This document discusses ratio analysis, which is an important tool in financial management. Ratio analysis involves calculating and comparing ratios using data from financial statements to evaluate a company's performance. There are three types of ratios: percentage ratios for profitability, turnover ratios computed in times, and simple ratios. Ratios can be classified based on the financial statements used - income statement ratios include gross profit ratio and net profit ratio, while balance sheet ratios include current ratio, debt-equity ratio, and fixed asset turnover ratio. Ratio analysis allows management to compare results over different periods and between companies.

1. I.H.M Dehradun
Accountancy ( Theory)
Notes by -:
G.K Sawhney
7895190950
TOPIC - RATIO ANALYSIS
Ratio Analysis- Ratio is the relationship between two items or two group of items on the
basis of amounts given in financial statement i.e Income statement & Position
statement .It is most important tool of Financial management. With the help of Ratio
analysis normally management compare the result of two companies relating same year
financial statement or between financial statement of two years of same company. With
the help of Ratio analysis financial managers may able to make effective planning for
next financial year/years.
TYPES OF RATIO’S
There are three types of ratios:
1) In percentage- Normally all profitability ratios are analysed or explained in terms
of percentage. For eg: Gross profit ratio, Net profit ratio, operating ration ,
operating profit ratio, etc.
2) In Turnover / In times- All turnover ratios’s are computed / analysed in times.
For eg: Stock turnover ratio(Inventory turnover ratio), Current assets turnover
ratio, Fixed assets turnover ratio, Average collection period , etc.
3) Simple ratio- 2:1 , 3:1 ,4:1 ,5:1 etc..
CLASSIFICATION OF RATIO’S
(a) On the basis of Financial statements
1) On the basis of Income statement or Profit & loss Account following ratios may
be computed / calculated.
i) Gross Profit Ratio- Gross Profit
Net sale x 100
ii) Net Profit ratio-Net profit/ Net sale x 100
iii) Operating ratio-Cost of good sold+ Operating expense/ Net sale x100
iv) Operating Profit ratio- Operating Profit / Net sale ×100
v) Stock / Inventory / Merchandise Turnover ratio- Cost of good sold / Average
stock
vi) Interest coverage ratio- Profit before interest & tax / Interest on debenture / loan
vii) Particular / Specific expense ratio- Particular expense / Net sale × 100
b) On the basis of balance sheet / Position Statement:

2. i) Current Ratio- Current Assets / Current liabilities
(NOTE- 2:1 is assumed satisfactory)
ii) Liquidity ratio/ Quick ratio / Acid test ratio- Quick asset / Liquid Asset / Current
liability / Liquid liability
(NOTE- Quick asset= Current asset – closing stock – Prepaid expense
Liquid asset = Current liability – bank overdraft
iii) Debt equity ratio = Debt / equity
(Working note- Capital employed = Fixed asset + Current asset – current liability
Capital Employed = Debt + equity
iv) Fixed asset to net worth = Fixed asset / Net worth ( or equity or shareholder funds)
v) Properirtory ratio / Shareholder funds to asset = Shareholder funds (equity) / Total
asset (Fixed asset + Current asset)
vii) Equity to total long term funds ,
Equity to total investment ,
Shareholder funds to total investment = Shareholder fund / Capital employed /
Total Investment
WORKING NOTE-
Net sale = Gross sale – Sales return
Cost of goods sold = Net sale –Gross profit
OR
Cost of goods sold = Opening stock + Purchases + Wages + Direct expense – Closing
stock