Ratio Analysis Ratio analysis is a process of determining and presenting the relationship between financial statement items and groups of financial statement items so as to provide information to the financial statements in a concise form. In the words of Myres, “Ratio analysis is largely a study of the relationship between various financial factors in a company as revealed by a single set of statements and a study of the performance of these factors as shown in a set of declarations". Benefits of Ratio Analysis It facilitates understanding of financial statements and evaluation of different aspects such as financial health, profitability and operational efficiency of the business. It provides intercompany comparison to measure efficiency and helps management take corrective measures. It is also useful for alerting you to any business maladies and helping management take corrective action. Analyzing trends with the use of ratios helps in planning and forecasting. It helps in investment decisions in the case of investors and in lending decisions in the case of bankers and financial institutions. Disadvantages of Ratio Analysis Ratios are an attempt to perform an analysis of past financial statements; therefore they are historical documents. Nowadays, keeping in mind the complexities of business, it is important to have an idea of ​​the probable future events. Changes in price levels make comparisons between different years difficult. For example, the ratio of sales to total assets in 1999 would be much higher than in 1980 due to rising prices. Types of Ratio 1.ROCE 2.Gross Profit 3.Operating Ratio 4.Price Earned 5.Dividend Ratio 6.Fixed Assets Ratio 7.Stock Turnover Ratio 8.Creditors Turnover 9.Debtors Turnover 10.Equity Ratio liquidity 11.Quick Report .. .... middle of document ......older equity + long term debt Example: Common stock capital for the year = $500000 8% preferred stock capital for the year =200000 Profit for the year = 300000 Long term debts for the year =400000 Debt to equity ratio= 400000 *100=28.75% 1000000+400000 Explanation: This is the most important ratio and is usually used by lenders in logarithmic term. It represents the composition of long-term investments in capital assets by outsiders and owners. According to prudential regulations, 60:40 is the required debt/equity ratio. This proportion reveals that in the total capital expenditure the financiers and 40% of the owners contributed 60%. This ratio gives reasonable security to lenders. References Advance Accounts Volume 1 by MCChukla Business Accounting by Frank Wood 7th Edition Financial Accounting by PBP