Ratio Analysis:- “Ratio Analysis is a technique of financial analysis which involves the
systematic establishment of a relationship between two inter-related accounting figures. It
simplifies complex financial data and helps in evaluating the liquidity, profitability, solvency, and
overall efficiency of a business enterprise.”
Nature of Ratio Analysis
Quantitative Relationship ;- Ratios express the relationship between two
accounting figures in numerical terms, making it easy to understand financial position.
Example: Current Assets ₹2,00,000 and Current Liabilities ₹1,00,000 → Current Ratio
= 2:1.
Based on Accounting Data:- Ratios are derived entirely from accounting records
such as Balance Sheet and Profit & Loss Account.
Example: Net Profit Ratio = Net Profit ÷ Net Sales × 100 (both from P/L A/c).
Simple & Understandable:- onverts complex accounting data into small,
understandable numbers that can be easily interpreted.
Example: Gross Profit Ratio = 40% tells profitability clearly without reading full
financial report.
Comparative in Nature:- Ratios are meaningful when compared with past years,
competitors, or industry standards.
Example: Current Ratio of 1.5:1 this year vs 2:1 last year → liquidity has decreased.
Dependent on Purpose:- Interpretation of ratios varies according to the user’s
perspective (management, investors, creditors).
Example: Debt-Equity Ratio = 1:1 → creditors see safety, investors see balanced risk,
manager sees cost of capital.
Inter-Related:- One ratio alone cannot give a full picture; different ratios must be
considered together for accurate analysis.
Example: High Sales Turnover ratio looks good, but if Net Profit Ratio is low → overall
efficiency is poor.
Different Types of Ratios
Liquidity Ratios
Liquidity Ratios are financial ratios that measure a firm’s ability to meet its short-term obligations
with its current assets. They show whether the business has enough liquid resources to pay its
immediate debts and maintain smooth operations.”
Current Ratio :-
Current Ratio measures a company’s ability to pay its short-term liabilities with its current assets.
Current Assets (CA):--Cash 💵,Bank balance ,Debtors / Accounts Receivable ,Inventory / Stock
Current Liabilities (CL):- Creditors / Accounts Payable ,Short-term Loans,Outstanding Expenses
Quick Ratio :-
Quick Ratio measures a company’s ability to pay its short-term obligations without relying on
inventory. It focuses only on the most liquid assets like cash, bank, and receivables.”
Quick Assets = Cash + Bank + Debtors + Short-term Investments
Current Liabilities = Creditors + Short-term Loans + Outstanding Expenses
Turnover Ratios
Turnover Ratios measure how efficiently a firm uses its assets to generate sales.
Business ka maal kitni tezi se bikta hai aur resources kitni efficiently use ho rahe
hain.”
Fixed Capital Turnover Ratio
, Fixed Capital Turnover Ratio measures how efficiently a business uses its fixed assets to generate
net sales.”
Net Sales = Total sales revenue
Fixed Assets = Plant, Machinery, Buildings, Equipment
Current Assets Turnover Ratio :-
Current Assets Turnover Ratio measures how efficiently a business is using its current
assets to generate net sales.”
Net Sales = Total sales – Sales returns
Average Current Assets = (Opening Current Assets + Closing Current Assets) ÷ 2
Working Capital Turnover Ratio
Net Sales = Total sales during the period
Working Capital = Current Assets – Current Liabilities
Profitability Ratios :-
Profitability Ratios measure a business’s ability to earn profit in relation to its sales,
assets, or capital, indicating how efficiently the resources are used to generate
earnings.”
Gross Profit Ratio
“Gross Profit Ratio shows the percentage of gross profit earned on net sales. It indicates how
efficiently a company produces goods compared to its sales.”
Gross Profit = Net Sales – Cost of Goods Sold (COGS)
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
Net Profit Ratio
“Net Profit Ratio shows the percentage of net profit earned on net sales after all expenses and
taxes. It indicates overall profitability of the business.”
Net Profit=Gross Profit−Operating Expenses−Interest−Taxes+Other Income (if any)
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
Operating Profit Ratio
Operating Profit Ratio shows the percentage of operating profit earned on net sales, ignoring non-
operating income and expenses. It reflects the efficiency of core business operations.”
Operating Profit=Gross Profit−Operating Expenses
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
Operating Expense Ratio
Operating Expense Ratio shows the percentage of operating expenses to net sales. It indicates
how much of sales revenue is consumed by operating expenses.”
ADD:- Salaries & Wages,Rent ,Utilities ,Depreciation
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
systematic establishment of a relationship between two inter-related accounting figures. It
simplifies complex financial data and helps in evaluating the liquidity, profitability, solvency, and
overall efficiency of a business enterprise.”
Nature of Ratio Analysis
Quantitative Relationship ;- Ratios express the relationship between two
accounting figures in numerical terms, making it easy to understand financial position.
Example: Current Assets ₹2,00,000 and Current Liabilities ₹1,00,000 → Current Ratio
= 2:1.
Based on Accounting Data:- Ratios are derived entirely from accounting records
such as Balance Sheet and Profit & Loss Account.
Example: Net Profit Ratio = Net Profit ÷ Net Sales × 100 (both from P/L A/c).
Simple & Understandable:- onverts complex accounting data into small,
understandable numbers that can be easily interpreted.
Example: Gross Profit Ratio = 40% tells profitability clearly without reading full
financial report.
Comparative in Nature:- Ratios are meaningful when compared with past years,
competitors, or industry standards.
Example: Current Ratio of 1.5:1 this year vs 2:1 last year → liquidity has decreased.
Dependent on Purpose:- Interpretation of ratios varies according to the user’s
perspective (management, investors, creditors).
Example: Debt-Equity Ratio = 1:1 → creditors see safety, investors see balanced risk,
manager sees cost of capital.
Inter-Related:- One ratio alone cannot give a full picture; different ratios must be
considered together for accurate analysis.
Example: High Sales Turnover ratio looks good, but if Net Profit Ratio is low → overall
efficiency is poor.
Different Types of Ratios
Liquidity Ratios
Liquidity Ratios are financial ratios that measure a firm’s ability to meet its short-term obligations
with its current assets. They show whether the business has enough liquid resources to pay its
immediate debts and maintain smooth operations.”
Current Ratio :-
Current Ratio measures a company’s ability to pay its short-term liabilities with its current assets.
Current Assets (CA):--Cash 💵,Bank balance ,Debtors / Accounts Receivable ,Inventory / Stock
Current Liabilities (CL):- Creditors / Accounts Payable ,Short-term Loans,Outstanding Expenses
Quick Ratio :-
Quick Ratio measures a company’s ability to pay its short-term obligations without relying on
inventory. It focuses only on the most liquid assets like cash, bank, and receivables.”
Quick Assets = Cash + Bank + Debtors + Short-term Investments
Current Liabilities = Creditors + Short-term Loans + Outstanding Expenses
Turnover Ratios
Turnover Ratios measure how efficiently a firm uses its assets to generate sales.
Business ka maal kitni tezi se bikta hai aur resources kitni efficiently use ho rahe
hain.”
Fixed Capital Turnover Ratio
, Fixed Capital Turnover Ratio measures how efficiently a business uses its fixed assets to generate
net sales.”
Net Sales = Total sales revenue
Fixed Assets = Plant, Machinery, Buildings, Equipment
Current Assets Turnover Ratio :-
Current Assets Turnover Ratio measures how efficiently a business is using its current
assets to generate net sales.”
Net Sales = Total sales – Sales returns
Average Current Assets = (Opening Current Assets + Closing Current Assets) ÷ 2
Working Capital Turnover Ratio
Net Sales = Total sales during the period
Working Capital = Current Assets – Current Liabilities
Profitability Ratios :-
Profitability Ratios measure a business’s ability to earn profit in relation to its sales,
assets, or capital, indicating how efficiently the resources are used to generate
earnings.”
Gross Profit Ratio
“Gross Profit Ratio shows the percentage of gross profit earned on net sales. It indicates how
efficiently a company produces goods compared to its sales.”
Gross Profit = Net Sales – Cost of Goods Sold (COGS)
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
Net Profit Ratio
“Net Profit Ratio shows the percentage of net profit earned on net sales after all expenses and
taxes. It indicates overall profitability of the business.”
Net Profit=Gross Profit−Operating Expenses−Interest−Taxes+Other Income (if any)
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
Operating Profit Ratio
Operating Profit Ratio shows the percentage of operating profit earned on net sales, ignoring non-
operating income and expenses. It reflects the efficiency of core business operations.”
Operating Profit=Gross Profit−Operating Expenses
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
Operating Expense Ratio
Operating Expense Ratio shows the percentage of operating expenses to net sales. It indicates
how much of sales revenue is consumed by operating expenses.”
ADD:- Salaries & Wages,Rent ,Utilities ,Depreciation
Net Sales = Total Sales – (Sales Returns + Trade Discounts + Allowances)
