This analysis is the tool of Finance. With ratio analysis, we can verify our financial position and revenue position. It is very obliging to analyze financial statement. It is also simple to understand and elucidate interpretations via such ratios.
Before discussing various ratios, you must understand the meaning of Ratio. Ratio is the relationship among two or more items of balance sheet or gain and loss account or both statements. For knowing short term position’s liquidity or strength, we can find current ratio, liquid ratio. Such ratios tell us what is the quantity of current assets that is in the business when we take the burden of current liabilities. When amount of current assets will be more than amount of current liabilities, then our liquidity position will strong. We can as well compute mixed ratios such as inventory turnover ratio, debtor turnover ratio and creditor turnover ratio.
Such ratios are very obliging to find following period:
1. With inventory turn-over ratio, we can compute inventory conversion period. When this period is too short then it means we contain power to sell our product greatly.
2. With debtor turn-over ratio, we can compute debtor conversion period, when this period is too short then it means that we can transform over credit sale greatly into cash.
3. With creditor turn-over ratio, we can compute creditor conversion period, when this period is short, then it means we are prepared vastly to decrease our current liabilities. This is bonus point when our debtor conversion period will also short. When debtor conversion period is long, then smallness of creditor conversion period is our negative point.
We can examine of profitability by making total profit ratio, net profit ratio, ROI ratio and operating ratio. We can also ensure our long term financial position’s weakness or strength by computing fixed asset and equity ratio, debt-equity ratio, current asset and capital employed ratio.
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