A ratio is a mathematical relation between one quantity and another. Suppose you have 200 apples and 100 oranges. The ratio of apples to oranges is 200 / 100, which we can more conveniently express as 2:1 or 2. A financial ratio is a comparison between one bit of financial information and another. Consider the ratio of current assets to current liabilities, which we refer to as the current ratio. This ratio is a comparison between assets that can be readily turned into cash -- current assets -- and the obligations that are due in the near future -- current liabilities. A current ratio of 2:1 or 2 means that we have twice as much in current assets as we need to satisfy obligations due in the near future.
Ratios can be classified according to the way they are constructed and their general characteristics.
By construction, ratios can be classified as a coverage ratio, a return ratio, a turnover ratio, or a component percentage:
1. A Coverage Ratio is a measure of a company's ability to satisfy (meet) particular obligations.
2. A Return Ratio is a measure of the net benefit, relative to the resources expended.
3. A Turnover Ratio is a measure of the gross benefit, relative to the resources expended.
4. A Component Percentage is the ratio of a component of an item to the item.
When we assess a company's operating performance, we want to know if it is applying its assets in an efficient and profitable manner. When we assess a company's financial condition, we want to know if it is able to meet its financial obligations.
There are six aspects of operating performance and financial condition we can evaluate from financial ratios:
1. A Liquidity Ratio............
Full Article on :
https://www.onlinesbs.in/2011/07/lets-discuss-some-interesting-facts-about-ratio-analysis.html
CAclubindia
