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Ratio Analysis

Ratio Analysis can be defined as the study and interpretation of relationships between various financial variables, by investors or lenders. It is a quantitative investment technique used for comparing a company's financial performance to the market in general. A change in these ratios helps to bring about a change in the way a company works. It helps to identify areas where the management needs to change.

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Types of Ratios Calculated
A number of ratios are calculated by companies for evaluating their short and long term performance and also to know liquidity and profitability. Some of the most commonly used ratios are:

Liquidity ratios: Can be defined as a ratio that indicates what proportion of a company's assets can be readily converted into cash in the short term. Some of the liquidity ratios are:
  • Current ratio
  • Quick ratio
  • Defensive interval ratio
  • Activity ratio
  • Acid turnover
  • Receivable turnover
  • Inventory turnover

Profitability ratio: Can be defined as a ratio that explains the profitability of a company during a specific period of time. It explains how profitable a company is. These ratios can be compared during different financial years to see the overall performance of a company. Some of the profitability ratios calculated are:
  • Return on assets
  • Return on common stock equity
  • Profit margin
  • Leverage ratio
  • Debt ratio
  • Equity ratio
  • Debt to equity ratio
  • Times interest earned
  • Degree of financial leverage
  • Per share ratios
  • Earnings per share
  • Price earnings ratio
  • Book value per share
  • Yield on common stock
  • Dividend payout ratio

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