Accounting Ratios A financial ratio is a relationship between two quantities on a company’s financial statements, which is derived by dividing one quantity by another. The purpose of using ratios is to reduce the amount of data to a workable form and to make it more meaningful. This goal is defeated if too many ratios are calculated. There are hundreds of ratios which could be calculated. A manager must learn which combination of ratios is most appropriate in a specific situation, remembering that ratios seldom provide conclusive answers; Ratios lead the manager to ask the right questions and sometimes give clues as to possible areas of corporate strength or weakness. Accounting Ratios Liquidity Ratios Liquidity ratios are designed to measure a company’s ability to meet its maturing Short-term obligations. Profitability Ratios Profitability ratios are designed to measure management’s overall effectiveness: Does the company control expenses and earn a reasonable return on funds committed? Capital Structure Ratios Capital structure ratios are divided into two groups which are: (a) those that examine the asset structure of the company; and (b) those that analyse the financing arrangements of the company’s total assets, in particular the extent to which the company relies on debt, known as the gearing ratios. Efficiency Ratios Efficiency ratios give an indication of how effectively a company has been managing its assets. Accounting Ratios Ratios produce performance measures which relate to the efficiency with which resources are allocated, appropriate measures must be used for: Revenues / Costs / Assets Assets appear in the bottom line of most of the measures, The following ratios are typically encountered in company accounts: ROI (Return on Investment) = ROE (Return on Equity) ROTA Return on Total Assets Gearing ratio ROCE Return on Capital Employed Profitability Ratios 1- Profit Margin=Profit/Sales If low then we need t

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