A ratio is a simple mathematical expression. It is a number expressed in terms of another number, expressing the quantitative relationship between two.
Ratio analysis is the technique of interpretation of financial statements with the help of meaningful ratios. They help us to draw certain conclusions with related facts is the basis of ratio analysis.
CLASSIFICATION OF RATIOS:
- Traditional Classification: Balance sheet ratios, P&L a/c ratios and mixed ratios.
- Functional classification: liquidity ratios, profitability ratios and earning ratios.
- Importance ratios: primary & secondary ratios. Primary- ROCE, secondary- operating profit ratio.
- Basis of point of time: Structural & Trend analysis.
- Basis of usage: for management, creditors and shareholders.
- Basis of nature of ratios: leverage, liquidity and turnover ratios.
Liquidity or Short term solvency Ratios.
- Current ratio
- Working capital ratio.
- Quick ratio.
- Liquidity ratio
- Absolute liquid ratio.
- Basic defensive interval ratio.
- Solvency Ratio.
Leverage or capital structure ratios.
- Debt & Equity ratio
- Capital gearing ratio
- Fixed asset ratio
- Interest coverage ratio or Debt service ratio
- Dividend coverage ratio
- Debt coverage ratio
Activity ratios or turnover ratios
- Inventory or stock turnover ratio
- Debtors turnover ratio
- Creditors turnover ratio
- Working capital turnover ratio
- Fixed assets turnover ratio
- Total assets turnover ratio
Profitability ratios
A). General profitability ratios
- Gross profit ratio
- Net profit ratio
- Operating ratio
- Operating profit ratio
- Expenses ratio
B). Overall profitability ratios.
- Return on capital employed ratio
- Return on proprietary ratio
- Return on net worth
- Return on equity capital
- Return on asset ratio
- Earning per share
- Dividend per share
- Dividend pay out ratio
- Price earning ratio( P/E ratio)
- Earnings yield (1 / P/E ratio)
- Dividend yield ratio
- Book value
