Tools of Operational Analysis- Ratio Analysis •Ratio analysis is a method of analyzing the financial...

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Tools of Operational Analysis- Ratio Analysis •Ratio analysis is a method of analyzing the financial statements to determine various relationships between selected items reported on financial statements. •Ratios are fractions where the numerator is expressed as a portion of the denominator. •A %; a numeric value; a quantity; per-unit •Ratios are useful only when compared to useful criteria. •Other properties & industry average •Ratios from prior periods •Planed ratio goals
Users of Ratios •Management •Evaluate financial results and monitor performance •Creditors •Assess risks of their loans or credits •Owners •Measure return on their investments •Assess risks of their investments
Type of Ratio Analysis 1.Liquidity Ratios 2.Solvency Ratios 3.Profitability Ratios 4.Turnover Ratios 5.Operating Ratios •
Liquidity Ratios •Measure the ability of the business to meet maturing short term obligations •Focuses on the Relationship between Current Assets and Current Liabilities •Examples: •Current Ratio •Acid Test / Quick Ratio •A/R as Percentage of Revenue •A/R Turnover •A/R Average Collection Period •Operating Cash Flows to Current Liabilities Ratio

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David · Accepted Answer

Introduction 
Financial analysis gives the clear outlook of the performance parameters of an organization. It 
helps in analyzing and comparing the present as well past performance. This analysis is a 
significant instrument for the management, investors as well as the outsiders who deal with 
organization. This analysis presents the way of functioning and the direction in which an 
organization is moving.
Ratio Analysis 
Ratio Analysis is one of the most widely used instrument of financial analysis. It is basically an 
effort to formulate a useful relationship between individual items or group of items in the 
balance sheet or income account. The use of ratio analysis is restricted not only to the internal 
parties but to the credit suppliers, banks and lending institutions also. Ratio Analysis gives 
information about the financial position of the company as to whether the capital structure of the 
business is appropriate, whether the credit policy in respect to sales and purchases is reasonable 
and whether the company is creditworthy. Thus, ratio analysis highlights the liquidity, solvency, 
profitability and capital gearing position.
Liquidity Ratios: 
Liquidity ratios are used to calculate firm’s short term obligations. It assists in comparing short 
term obligations with short term funds available to pay off these obligations. Liquidity ratios 
indicate the relationship of a firm’s cash and other current assets to its current liabilities.
Current Ratio: This ratio shows the proportion to which current liabilities are covered by current 
assets. 
Current Ratio=Current Assets/Current Liabilities 
Current ratio of a company should be at least 2 times, i.e. current assets should be twice as 
current liabilities of any firm. 
Greater the current ratio, higher is the firm’s ability to meet its short term obligations.

Tools of Operational Analysis- Ratio Analysis •Ratio analysis is a method of analyzing the financial statements to determine various relationships between selected items reported on financial...

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