4.1 Introduction of Ratio

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship of two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the 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 decimal 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 statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk and return relationship of firms of different sizes. It is defined as the systematic use ratio to interpret the financial statement so that the strengths and weaknesses of a firm as well as historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two the items/variable. This relationship can be expressed as (i) percentages, say, net profits are 25percent of sales (assuming net profits of Rs

25,000 and sales of Rs. 1, 00,000), (ii) fraction (net profit is one –fourth of sales) and (iii) proportion of numbers (the relationship between net profits and sales is 1:4).these alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratios does not add any information not already inherent in the above figures of profit and sales. What the ratio does is that they reveal the relationship in a more meaningful way so as to enable equity investors; management and lenders make better investment and credit decisions.

The rationale of ratio