Business Techniques ( RATIO ANALYSIS )

                             

Ratio Analysis analyses the relationship between 2 variables . Here are different types of Ratio Analysis : 

1. Profitability Ratio
2. Liquidity Ratio
3. Shareholder Ratio 

PROFITABILITY RATIOS

The  Profitability Ratio :

1. Gross Profit Margin

Gross Profit Margin is the amount of gross profit a business earn on each good sold .The higher the result the better it  is for the business .Gross profit margin is calculated as follows :

Gross profit / Sales * 100

2. Net Profit Margin

NPM analyses the relationship between net profit and sales . It show  how much net profit a business get on each good sold . The higher the net profit is the better it is for the business .

It is calculated as follows :

Net Profit / Sales * 100

3. Return On Capital Employed ( ROCE )

ROCE show the best performance of a business it show the  return to owner on their investment .

It is calculated as : 

Net profit / Capital Employed * 100 

LIQUIDITY RATIOS

Liquidity Ratio analyses the liquidity position of a business . It measure the ability of a business to pay its short term debts . If the business is able to meet its short term debts this signifies that the business have a good liquidity position . There are two types of liquidity ratio those are :

1. Current Ratio
2. Acid Test Ratio

1. Current Ratio

If the ratio is less than 1 that signifies that business does not have sufficient current asset to pay its current liabilities . Thus it will be  unable to pay its short term debts . Therefore the business will have liquidity problems

If the ratio is equal to 1 , this mean that the business will be able to pay its short term debts but  if unforeseen expenses occur the business will not be able to meet up the additional expenses .

If the business ratio is greater than 1 but less than 2  this mean that the business will be able to pay short term debts as well as meet additional expenses .

Current Ratio is calculated as follows :

Current Asset / Current Liabilities

2. Acid Test Ratio

 Acid Test Ratio is also known as Quick Ratio . It is a liquidity ratio that take into consideration those current asset which are more liquid and ignore those which are less liquid . Acid test ratio is calculated as follows : 

Current Asset - Inventory / Current Liabilities

SHAREHOLDER RATIO

Shareholder Ratio is also know as Investment Ratio . This ratio show the prospect of financial gain .

It contain 3 ratios , those are :

1. Dividend Yield Ratio
2. Dividend Cover Ratio
3. Price Earning Ratio

1. Dividend Yield Ratio

This ratio show return on investment . It is calculated as follows :

Dividend per share / market price * 100

2. Dividend Cover Ratio

This ratio show the number of time profit covers dividend per year . The higher the result the better it is . It is calculated as  follows : 

Profit for the year / annual dividend

3. Price Earning Ratio

It is a vital ratio for shareholder and investors . It shows the confidence in the future prospect in the business . It is calculates as follows :

Current Share Price / Earning Per Share

Those are the important which are used by business so as to achieve their success .

Credit : BI