Ratio Analysis Summary

 Ratio Analysis Summary

Ratio Analysis Summary

1. Ratio analysis is the most widely used technique for interpreting and comparing financial reports. It analyses financial data from the firm’s Profit and Loss Account and Balance Sheet.

2. Objective of Ratio Analysis

(i) To allow comparisons to be made with assist in predicting the future.

(ii) To investigate the reasons for the changes.

(iii) To construct a simple explanation of complicated financial statement by its expressions in one figure.

3. Users of ratio can be classified into two groups – internal and external. Internal group consist of directors, shareholders, partners, managers, etc. External group consist of investors, lenders, suppliers, employees, labour union, customer, etc.

4. Liquidity ratios measure the ability of a firm to meet its short-term obligations. Short-term is conventionally viewed as a period up to one year.

5.  Current Ratio is the relationship between current assets and current liabilities. It is quoted as a single figure (not a percentage).

6. The quick ratio is the relationship between quick assets and quick liabilities. Quick assets are all those assets which in the ordinary course of business will be converted into cash. Therefore, quick assets are current assets less stock and prepaid expenses, i.e., cash, bank, debtors, and readily realisable marketable securities.

7. Debt-equity Ratio is the ratio between long-term debt and shareholder funds.