OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organization-A)Solvency-1)Long term2)Short term3)ImmediateB)StabilityC)ProfitabilityD)Operational efficiencyE)Credit standingF)Structural analysisG)Effective utilization of resourcesH)Leverage or external financing
FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more variables/ accounting figures, such relationship can be expressed in different ways asfollows –
A] As a pure ratio:
For example the equity share capital of a company is Rs. 20,00,000 &the preference share capital is Rs. 5,00,000, the ratio of equity share capital topreference share capital is 20,00,000: 5,00,000 or simply 4:1.
B] As a rate of times:
In the above case the equity share capital may also be described as 4times that of preference share capital. Similarly, the cash sales of a firm are