RATIO ANALYSIS
RATIO ANALYSIS
MEANING
OF RATIO
A ratio is one figure express in terms of another
figure. It is mathematical yardstick that measures the relationship two figures
which are related to each other and mutually interdependent. Ratio express by dividing
one figure with other related figure. Thus a ratio is an expression relating
one number to another. It is simply the quotient of two numbers. It can be
expressed as a fraction or as a pure ratio or in absolute figures as “so many
times”. As accounting ratio is an expression relating two figures or accounts
or two sets of account heads or group contain in the financial statement.
MEANING
OF RATIO ANALYSIS
Ratio analysis is the method or process by which the
relationship of items or group of items in the financial statement are
computed, determined and presented.
Ratio analysis is an attempt to derive quantitative
measure or guides concerning the financial health and profitability of business
enterprise, ratio analysis can be used both in trend and static analysis. There
are several ratios at the disposal of an analyst but their group of ratio he
would prefer depends on the purpose and the objective of the analysis.
While detailed explanation of ratio analysis is
beyond the scope of this section, we will focus on a technique which is easy to
use. It can provide you with a valuable investment analysis tool. This
technique is called cross sectional analysis. Cross sectional analysis compares
financial ratios of several companies from the same industry. Ratio analysis
can provide valuable information about a company’s financial health. A
financial ratio measures a company’s performance in a specific area. For
example you could use a ratio of company’s debt to its equity to measure a
company’s leverage. By comparing the leverage ratios of two companies you can
determine which company uses greater debt in the conduct of business. A company
whose leverage ratio is higher than a competitor’s has more debt per equity.
You can use this information to make a judgment as to which company is a better
investment risk.
However, you must be careful not to place too much
importance on one ratio. You obtain a better indication of the direction in
which a company is moving when several ratios are taken as a group.
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