MEANING OF RATIO: Relationship between two or more figures expressed in arithmetical terms, is called a ratio. It can be expressed in the form of fraction, percentage, times, etc.

MEANING OF ACCOUNTING RATIO/ RATIO ANALYSIS:- Ratio Analysis is the study of relationship between the items of financial statement such as item of Statement of P&L and Balance Sheet.

CLASSIFICATION OF RATIOS:-

1- LIQUIDITY RATIO: (It shows short term financial position).
  i. Current Ratio/Working Capital Ratio=
            Current Assets.     
              Current Liabilities
 
  ii. Quick Ratio =    Quick Assets.  
                               Current Liabilities
Where, 
Quick Assets = Current Asset—Inventory—Prepaid Expenses—Advance Tax.

2- SOLVENCY RATIO:  (It shows long term financial position).
    i. Debt Equity Ratio = 
                 Long term Debt.  
                 Shareholder's Fund
Where, 
•Long term Debt = Long term Borrowings+Long term Provisions.
•Shareholder's Fund = Share Capital +Reserves & Surplus.

   ii. Total Assets to Debt Ratio =
             Total Assets.     
              Long term Debt

   iii. Proprietory Ratio =
             Shareholder's Fund.  
                   Total Assets

   iv. Interest Coverage Ratio =
          Profit before Interest&Tax. 
                   Fixed Interest

3- TURNOVER RATIO/ACTIVITY RATIO/PERFORMANCE RATIO:-

   i. Inventory Turnover Ratio =     
      Cost of Revenue from Operation. 
              Average Inventory
Where, 
•Cost of Revenue= Opening Inventory+Net Purchase+Direct Expense—Closing Inventory.
                        OR
•Cost Of Revenue= Revenue From Operation—Gross Profit/(+Gross loss).

•Average Inventory= 
  Opening Inventory + Closing Inventory. 
                        2

  ii. Trade Receivable Turnover Ratio=
        Credit Revenue From Operation.                 Average Trade Receivable
Where,
•Average Trade Receivable =
Op.Trade Receivable+Cl.TradeReceivable                                 2

•Average Collection Period = 
                      365.            
        Trade Receivable Turnover Ratio

NOTE: By calculating Trade Receivable Turnover Ratio, provision for Doubtful Debts doesn't deduct from Debtors or Trade Receivable.

   iii. Trade Payable Turnover Ratio=
             Net Credit Purchase.                                            Average Trade Payable
Where,
•Average Trade Payable = 
Opening Trade Payable+Closing Trade Payable                            2

•Average Payment Period = 
                    365.              
        Trade Payable Turnover Ratio

   iv. Working Capital Turnover Ratio=
          Revenue from operation.     
                 Working Capital
Where,
•Working Capital = Current Asset—Current Liabilities.

4- PROFITABILITY RATIO:–

   i. Gross Profit Ratio =
           Gross Profit. ×100         
              Revenue From Operation
   
   ii. Net Profit Ratio =
            Net Profit ×100         
              Revenue From Operation
Where,
•Net Profit= Gross Profit+Operating Income+Non–Operating Income—Operating Expenses—Non-operating Expenses.

    iii. Operating Ratio =  
[Cost of Revenue+Operating Expenses]×100
           Revenue From Operation
Where,
Operating Expenses= Selling and Distribution Expenses, Office and Administrative Expenses, Depreciation, Bad-Debts.

   iv. Operating Profit Ratio =
          Operating Profit × 100.    
              Revenue From Operation
Where,
•Operating Profit = Gross Profit+Operating Income—Operating Expenses.
                         OR
•Operating Profit = Net Profit+Non-Operating expenses—Non-operating Income.

•Operating Profit = Revenue From Operation—Operating Cost.

Where,
•Operating Cost= Cost of Revenue +Operating Expenses.
Where,
Operating Profit Ratio = 100—Operating Ratio.

•Operating Incomes = Discount received, Commission received.

•Non-Operating Expenses = Loss on Sale of fixed Assets, Loss by fire, etc..

•Non-Operating Income = Profit on sale of fixed Assets, Interest received on Investment, Dividend received, etc.

 v. Return on Investment =
Profit before Interest, Tax& Dividend×100
             Capital Employed
Where,
By Liability Approach:
Capital Employed= Share Capital + Reserves & Surplus + long term Debts

By Assets Approach:
Capital Employed = Fixed Assets+Non-Current Investment+Long term loans and advances+Working Capital.