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C H A P T E R
Ratio Analysis
MEANING OF KEY TERMS USED IN THE CHAPTER
1. Ratio
It is an arithmetical expression of relationship between two interdependent or related items.
2. Accounting Ratio
Accounting Ratio means ratio calculated on the basis of accounting information (data).
3. Ratio Analysis
Analysis of financial statements on the basis of accounting ratios is known as Ratio Analysis.
4. Pure Ratio
It is a ratio expressed as a quotient. For example, Current Ratio is ratio of Current Assets to
Current Liabilities. If Current Assets are ` 20 lakh and Current Liabilities are ` 10 lakh, then the
Current Ratio is 2 : 1.
5. Percentage
It is a ratio expressed in percentage. For example, Net Profit Ratio is calculated as percentage
of Revenue from Operations. if Net Profit is ` 10 lakh and Revenue from Operations
is ` 50 lakh, then Net Profit Ratio comes to 20%.
6. Times
It is a ratio expressed in number of times. For example, Trade Receivables Turnover Ratio is
3 times [Calculated by dividing Credit Revenue from Operations (` 3,00,000) by Average Trade
Receivables (` 1,00,000)].
7. Fraction
It is a ratio expressed as a fraction. For example, ¾ or .75.
8. Liquidity Ratios
These ratios show the ability of the enterprise to meet its short-term financial commitments. These
include: Current Ratio and Quick Ratio/Liquid Ratio.
9. Solvency Ratios
These ratios measure long-term financial position of the enterprise. These include: Debt to Equity
Ratio; Proprietary Ratio; Debt to Total Assets Ratio and Interest Coverage Ratio.
10. Activity or Turnover Ratios
These ratios measure efficiency in use of assets of the enterprise in generating sales. These include:
Trade Receivables Turnover Ratio; Trade Payables Turnover Ratio; Working Capital Turnover Ratio
and Inventory Turnover Ratio.