Ratio analysis and their significance
RATIO ANALYSIS
Meaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions.
According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of the quantitative relationship between two numbers”.
Ratio Analysis:Ratio analysis is the process of determining and interpreting numerical relationship based on financial statements. It is the technique of interpretation of financial statements with the help of accounting ratios derived from the balance sheet and profit and loss account.
Ratio analysis can also be defined as the process of determining and presenting the relationship of items and group of items in the financial statements.
Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is also a helpful tool in assisting the management make good business decisions and judgments, in the current uncertain and constantly changing environment.
Ratio analysis can represent following three methods.
Ratio may be expressed in the following three ways :
1. Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by another.
For example , if the current assets of a business are kshs 500,0000 and its current liabilities are kshs150,000, the ratio of ‘Current assets to current liabilities’ will be 3.33:1.
Current Ratio= Current Assets divided by Current liabilities, the ideal ratio is 2:1, but in the example given above its 3.33:1 A high ratio indicates under trading and over capitalization while a Low ratio indicates over trading and under capitalization.
Prepared by Fred M’mbololo
1
2. ‘Rate’ or ‘So Many Times :- In this type , it is calculated how many times a figure is, in comparison to another
Meaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions.
According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of the quantitative relationship between two numbers”.
Ratio Analysis:Ratio analysis is the process of determining and interpreting numerical relationship based on financial statements. It is the technique of interpretation of financial statements with the help of accounting ratios derived from the balance sheet and profit and loss account.
Ratio analysis can also be defined as the process of determining and presenting the relationship of items and group of items in the financial statements.
Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”. It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is also a helpful tool in assisting the management make good business decisions and judgments, in the current uncertain and constantly changing environment.
Ratio analysis can represent following three methods.
Ratio may be expressed in the following three ways :
1. Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by another.
For example , if the current assets of a business are kshs 500,0000 and its current liabilities are kshs150,000, the ratio of ‘Current assets to current liabilities’ will be 3.33:1.
Current Ratio= Current Assets divided by Current liabilities, the ideal ratio is 2:1, but in the example given above its 3.33:1 A high ratio indicates under trading and over capitalization while a Low ratio indicates over trading and under capitalization.
Prepared by Fred M’mbololo
1
2. ‘Rate’ or ‘So Many Times :- In this type , it is calculated how many times a figure is, in comparison to another