Accounting Ratio
A ratio is a mathematical relationship of two or more numbers and when these two numbers are taken from financial statements, this is called Accounting ratio.
Accounting ratio can be expressed as under:
1. Proportion (pure form): e.g.2:1, 1:1.
All current ratios and solvency ratios are expressed in pure form except Interest Coverage Ratio which is expressed in number of times.
2. Percentage e.g. 15%, 20%.
All profitability ratios are presented in percentage form.
3. Times e.g. 4 times, 3 times.
All turnover ratios are presented in no. of times. But average collection period and average payment period is expressed in number of days or months.
4. Fraction e.g. 3/4 or .75.
All solvency ratios are also presented in fractions except Interest Coverage Ratio which is presented in no. of times.
Objective:
The basic objective of ratio is the analysis of the profitability, liquidity, solvency and efficiency levels in the business to understand the strengths, weaknesses, making inter-firm and intra-firm comparisons for better understanding and decision making.
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