RATIO ANALYSIS –AN OVERVIEW:

Performance Evaluation forms the basis of the control system of management. Comparison of actual figures with the budgeted figures periodically will help the managers to ascertain the level of performance. Performance evaluation of employees is also important to undertake various decisions relating to their promotion avenues, training requires in future and to fix the salary also. There are various financial measures that can help in performance evaluation of cost, profit and investment centres. Ratio analysis is an important analytical to measure the performance.

Ratios help in determining the arithmetic relationship between the two figures or are simply defined as an expression of one number in terms of another. On the other hand ratio analysis is defined as the systematic use of ratio to interpret financial statements. Or in other words ratio analysis is a process of establishing ratios to make important organizational decisions. It consists of the following basic steps:

• Determine the primary objective of analysis.
• Select data from financial statements relevant for such analysis
• Calculating required ratios
• Compare the results of above calculated ratios with ratios of past or with ratios of another firm.
• Interpreting of ratios

TYPES OF RATIOS:

Various types of ratios are calculated to evaluate the performance. These are generally classified under the following heads on the basis of purpose they served:

1. Profitability ratios:

   These ratios are calculated to enlighten the end results of business activities and are of utmost importance. It include the below said ratios:

• Gross profit ratio

• Operating ratio

• Expenses ratio

• Operating profit ratio

• Net profit ratio

• Return on capital employed

• Return on shareholders fund

• Earnings per share

• Payout ratio

 

2. Coverage ratios:

   These ratios indicate the extent to which the persons entitled to get interest or dividend as per agreed terms is safe. It includes ratios such as:

• Fixed interest cover

• Fixed dividend cover

 

3. Turnover (or performance or activity) ratios:

   These ratios will indicate the usage of asset usage and are expressed in number of times rather than percentage. It includes the following ratios:

• Capital turnover Ratio

• Fixed assets turnover Ratio

• Working capital turnover Ratio

• Total assets turnover Ratio

• Stock turnover Ratio

 

4. Financial ratios:

   These ratios judge the financial position of concern from long term and short term solvency point of view.

   Liquidity ratios: It generally includes the following ratios:

• Current Ratio

• Liquid Ratio

• Absolute liquidity Ratio

• Working capital Ratio

          Stability ratios: It generally includes the following ratios:

• Fixed assets Ratio

• Ratio of current to fixed assets

• Debt equity Ratio

• Proprietary Ratio

 

5. Control ratios:

   These ratios help the management in determining that whether deviation in actual and budgeted performance is favourable or unfavourable. It includes the following ratios:

• Capacity ratio

• Efficiency ratio

• Calendar ratio