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.
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
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- Acid turnover
- Receivable turnover
- Inventory turnover
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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
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- 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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