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Ratio Analysis

Radha Krishna Patro
20 May 0 0

How ratio analysis helps to finance manager on decision making.

Ans- First, we have to understand what are all the types of Ratio Analysis. The first one is Liquidity Ratios, which includes Current ratio, Quick ratio, and working capital ratio. These ratios help in understanding the short term liquidity position of a firm. We can calculate these ratios by using current assets and current liability from the Balance Sheet.

Activity Ratios:- This indicates the efficiency of a business organisation in the utilisation of funds. These ratios help the banker to ascertain the working capital need of the firm. The vital rate includes Inventory turnover ratio, Debtors turnover ratio, Creditors turnover ratio, and Fixed assets turnover ratio.

Leverage Ratios/Solvency Ratios:- This indicates the long term solvency of a business firm, which is essential for continuity of business. It includes the Debt-Equity ratio and Debt service coverage ratio.

Profitability Ratios:- The ratio indicates the efficiency of the business in generating profit and surplus. The rate includes Gross profit ratio, Operating profit ratio, Net profit ratio, Return on Asset, and Return on Equity etc.

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