Ratio analysis is a tool that is used for getting a quick indication of a company’s financial condition in respect to market.  As a form of Financial Statement Analysis, this is calculated in a specific manner.

How to calculate ratio analysis?

Certain details are to be placed while calculating ration analysis. These include:

Liabilities:

• Sundry creditors
• Dividends and payable bills
• Share capital
• Debentures
• Short term advances
• Accrued expenses

Assets:

• Fixed capital (Machinery, Land, Building)
• Receivable bills
• Sundry debtors
• Cash at bank
• Inventories
• Patents
• Prepaid expenses

Current Ratio = Current Assets/Current Liabilities

Liquid Ratio = (Current Assets – Prepaid and Stock Expenditure)/Current Liabilities

Gross Profit Ratio = (Gross Profit/Net Sales) x 100

Gross Profit = Sales – Cost of Goods Sold

Net Sales = Gross Sales – Sales Return/Return Inwards

Inventory Turnover Ratio = (Turnover/Total Assets) x 100

With help of these formulas most of the sums can be calculated.

Links of Next Finance Topics:-

• Introduction to accounting and branches of accounting
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• Advantages of ratio analysis
• Limitation of ratio analysis
• Classification of ratios
• Liquidity short term solvency ratios
• Long term solvency ratios
• Profitability ratios
• Activity or turnover ratios

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