Top 5 tips for doing ratio analysis
Ratio analysis or financial ratio as it is also called, is a list of financial tests t...
Analysis of given ratios: After all the calculations have been done, sometimes, you might
have to determine the financial ...
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Top 5 tips for doing ratio analysis

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Top 5 tips that would help you doing ratio analysis assignment easily

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Top 5 tips for doing ratio analysis

  1. 1. Top 5 tips for doing ratio analysis Ratio analysis or financial ratio as it is also called, is a list of financial tests that determine the financial functionality, stability and the overall condition of a business concern. These financial ratios are used mainly by finance managers, bankers, shareholders, creditors, etc for various purposes. The topic of ratio analysis can be generally found in advanced management accounting. Some of the very popular ratios include Current ratio, Liquidity ratio, Acid test ratio, Cash Ratio, Operation cash flow ratio, Assets turnover ratio, stock turnover ratio, Inventory conversion ratio, Debt ratio, Debt to equity ratio, Long term debt to equity ratio, Earnings per share, Payout ratio, Dividend cover, etc and many more. Each of these ratios has its own benchmark levels and one ratio’s benchmark level may not be relevant to another ratio’s benchmark level. And these ratios are divided and segregated under various heads like Liquidity Ratios, Activity Ratios, Profitability Ratios, Debt Ratios, Market Ratios, etc. In order to calculate these ratios, you would need two or more financial statements which include the Balance Sheet, Income Statement or Profit & Loss Accounts. This is the reason why not just profitability or profit earned is not the only area of concern for any company. But, overall financial health which includes all the above mentioned and other ratios’ calculation. Tips for doing ratio analysis Remember the most important ratios: It is one of the basic criteria for mastering ratio analysis. Though, the calculation part is pretty easy, the steps involved and sometimes the formulae used for calculating the ratios can be pretty tough to remember. So, the first thing is to understand each of the ratios’ importance and remember them thoroughly. Practice: The only way to master ratio analysis is by practicing it many number of times with various scenarios, permutations and combinations. Only when you practice each and every ratio thoroughly, you can remember the steps very well. Thereby you don’t have to struggle before your exams. Remember ratios with thumb rules: Most ratios can be remembered by practice, but there are some ratios which need heavy prior calculations before arriving at the answer. For such ratios, the prior calculations are very important without which the answer would be totally wrong. So, remember such ratios with some easy thumb rules that you can recall very easily. Ex: Cash flow to debt ratio, you need to calculate the cash flow before calculating the ratio. Be thorough with your math: In order to calculate the ratios accurately and perfectly, you need to be thorough with your math. You need to be quick in your calculations, especially multiplication and division. If you’re perfect here, the final answers would definitely be very accurate.
  2. 2. Analysis of given ratios: After all the calculations have been done, sometimes, you might have to determine the financial position of company just by looking at the ratios only. Determining the health of a company with just the ratios can be tough, but an approximate determination can mean that you have a good grip over the subject.

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