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.
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.