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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.
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