What is the meaning of Ratio Analysis of a financial statement?

The term ratio means a simple division of one number by another. It is measured by the number of times one number is contained by the other, either integrally or in fraction. The ratio analysis of financial statement means the process of calculating structural relations of different items and groups in the financial statements. Generally, the ratios are of following three kinds.

1. Balance sheet ratio: Balance sheet ratios indicate the relationship between various balance sheet items.

2. Operating ratio: The operating ratios exhibit the relationship of expense accounts to income.

3. Inter-statement ratio: Inter-statement ratios show the relationship of balance sheet items to income and expenses accounts.

Ratios are classified into three broad categories. They are Structural ratios, Profitability ratios and turn over ratios.

Examples of capital structural ratios are Current Ratio, Quick ratio, proprietary or equity asset ratio, fixed assets to tangible net worth , current debt to tangible net worth, total debt to tangible net worth, inventory to net working capital, current debt to inventory etc.

Examples of profitability ratios are ‘Net profit on net sales’,’ Net profit on tangible Net worth’, ‘Gross profit to net sales’, ‘Net profit to total sales’ etc.

Examples of Turn over ratios are Sales to receivables, sales to inventory, Sales to total assets etc. Turnover ratio is also known as inter-statement Ratio.

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