RATIO ANALYSIS, Expression of Ratio, percentage, time, fraction, classification of Ratio

1. Dr.V.SAKTHIDEVI
Assistant Professor,
Department of Commerce (SF),
V.V.Vanniaperumal College for Women,
Virudhunagar

2. The relationship between two figures
expressed mathematically is called a ‘Ratio’. It
is a numerical relationship between two which
are related in some manner.

3. An analysis of financial statements with the help of
ratio is termed as ratio analysis.

4. Accounting ratios may be expressed in the following ways:
1.Proportion
In this case the relationship between two figures is
expressed in common denominator.
E.g. Current Asset 1,50,000; Current liabilities 50,000
So the ratio between current asset and current liabilities
will be 3:1

5. A ratio expressed in percentage. In this case, one
number is divided by another and it is multiplied by 100.
E.g. Sales for the year Rs.4,00,000 and net profits
Rs.80,000. then percentage of Net profit to sales will be
20%.

6. In this case, a ratio is expressed in a number of times a
particular figure is compared to another figure.
E.g. Sales for the year 4,00,000 and Fixed Asset are
Rs.1,00,000 it indicates the sales are 4 times of Fixed
Assets.

7. In this form, the ratio expressed in fraction.
E.g.
Share capital Rs.3,00,000 Fixed Asset Rs.2,40,000
The ratio of fixed Asset to share capital
2,40,000/3,00,000 = 4/5

8. I. Classification according to statement
II. Classification according to function

9. Profit and loss account ratios – Ratios calculated on
the basis of the items of the profit and loss account
only. E.g. gross profit ratio, net profit ratio etc

10. Gross profit ratio
This ratio express the relationship between gross
profit and net sales
= Gross profit / Net sales * 100

11. Net profit ratio
This ratio measures the relationship between net
profit and net sales
= Netprofit / Net sales * 100
Net sales = Sales – Sales returns

12. Ratios are calculated on the basis of the figures of
the balance sheet only. E.g. current ratio, quick
ratio,

13. Current ratio
Current ratio is the relationship between
current asset and current liabilities. ideal
Current ratio is 2:1
Current asset / Current liabilities *100

14. Current asset includes
Cash, stock, Debtors, Bills receivable, prepaid
expenses , Account receivable etc.,
Current liabilities includes
Creditors, Bills payable, Bank O/D, Outstanding
expenses , Account payable etc.

15. Quick Ratio
Quick ratio is also called Acid-test ratio. It is
the relationship between quick assets and quick
liabilities.
ideal quick ratio is 1:1

16. Quick ratio
= Quick assets / Quick liabilities * 100
Quick assets = Current assets – (Stock +Prepaid
expenses)
Quick liabilities = Current liabilities – Bank O/D

17. Turnover ratio (or) Activity ratio
It indicate the relationship between sales and
various assets of the firm.

18. Stock Turn over ratio
=Cost of goods sold/ Average stock
Cost of goods sold = opening stock + purchase –
Closing stock
= Sales – Gross profit
Average stock = Opening stock + Closing stock/2

19. 1) Calculate profitability ratio
Rs Rs.
Sales 2,00,000 Administration expenses 20,000
Gross profit 70,000 Income from investments 22,000
Selling expenses
10,000
Loss due to fire 12,000

20. Gross profit ratio
= Gross profit / sales * 100
= 70,000/2,00,000 * 100
=35%

21. Net profit ratio
= Net profit / sales * 100
Net profit = Gross profit + operating income –
Operating expenses
= (70,000+22,000) – 42,000
= 50,000 / 2,00,000 * 100
=25%

22. Thank you