Ratio Analysis Formula - Learn the Uses of Ratio Analysis Formula (2024)

FAQs

What is the formula for ratio analysis? ›

Ratio Analysis Formula = a/b × 100% Some of the frequently used ratios in accountancy and business are as follows. These ratios are helpful to quickly analyze and make the needed conclusion.

Ratios compare two numbers, usually by dividing them. If you are comparing one data point (A) to another data point (B), your formula would be A/B. This means you are dividing information A by information B. For example, if A is five and B is 10, your ratio will be 5/10.

Ratio analysis is referred to as the study or analysis of the line items present in the financial statements of the company. It can be used to check various factors of a business such as profitability, liquidity, solvency and efficiency of the company or the business.

Examples of Ratio Analysis in Use

For example, suppose company ABC and company DEF are in the same sector with profit margins of 50% and 10%, respectively. An investor can easily compare the two companies and conclude that ABC converted 50% of its revenues into profits, while DEF only converted 10%.

It helps in determining how efficiently a firm or an organisation is operating. It provides significant information to users of accounting information regarding the performance of the business. It helps in comparison of two or more firms. It helps in determining both liquidity and long term solvency of the firm.

Like fractions, ratios can often be simplified. To simplify a ratio, divide all parts of the ratio by their highest common factor. For example, the highest common factor of both parts of the ratio 4:2 is 2 , so 4:2=2:1 4 : 2 = 2 : 1 .

For example, if there is 1 boy and 3 girls you could write the ratio as: 1 : 3 (for every one boy there are 3 girls) 1 / 4 are boys and 3 / 4 are girls. 0.25 are boys (by dividing 1 by 4)

The current ratio measures a company's capacity to pay its short-term liabilities due in one year. The current ratio weighs a company's current assets against its current liabilities. A good current ratio is typically considered to be anywhere between 1.5 and 3.

The first step in ratio analysis is to determine the purpose of analyzing. One should be specific about which aspect is needed to be evaluated i.e., whether the profitability, solvency, liquidity or operational efficiency of the business. 2. The next step includes choosing the ratios among various ratios in each group.

What are the 5 types of ratio analysis? ›

These ratios can give you valuable insights into the company's performance. Profitability ratios, solvency ratios, liquidity ratios, turnover ratios, and earning ratios are five types of ratio analysis.

Return on equity ratio

This is one of the most important financial ratios for calculating profit, looking at a company's net earnings minus dividends and dividing this figure by shareholders equity. The result tells you about a company's overall profitability, and can also be referred to as return on net worth.

If put this into a calculator (3 divided by 5), you will get a decimal of 0.6 as the answer. This means that any two numbers that divide and come to the same answer are equivalent to 3/5.

When a value is shared in the ratio 2:3, it means that the value is divided into two parts and three parts, respectively, and these parts are proportional to the ratio of 2 to 3. This ratio can be expressed as 2/5 and 3/5.

What is the ratio of 2 to 4? The ratio of 2 to 4 can be written as 2:4, or we can write it in fraction form as 2/4. We can simplify the fraction by dividing both the 2 and 4 by 2 to get 1/2. Thus, the ratio of 2 to 4 is 2:4 or 1:2.

Ratio and Proportion Formula

For example, ratio 2 : 7 is also represented as 2/7, where 2 is the antecedent and 7 is the consequent. The two terms b and c are called mean terms. The two terms a and d are known as extreme terms. The proportion formula can be expressed as, a/b = c/d or a : b : : c : d.