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Unit 4: Ratio Analysis




          Objectives                                                                            Notes

          After studying this unit, you will be able to:


               Illustrate the key ratios like liquidity, solvency, profitability and turnover
               Describe DUPONT analysis
               Explain the relevance of ratio analysis

          Introduction

          The ratio analysis is one of the important tools of financial statement analysis to study the fi nancial

          stature of the business fleeces, corporate houses and so on.

          According to J. Batty, “The term accounting ratio is used to describe signifi cant relationships
          which exist between figures shown in a balance sheet, in a profit and loss account, in a budgetary


          control system or in any other part of the accounting organization”.


          Financial statements contain substantial information (figures) relating to profit or loss and fi nancial
          position of the business. If these items in financial statements are considered independently it


          may or may not be of much use. To make a meaningful reading of financial statements, these

          items found in financial statements have to be compared with one another. Ratio analysis, as
          a technique or analysis of fi nancial statement uses this method of comparing the various items
          found in fi nancial statements.
          4.1 Defi nition

          According to J. Betty, “The term accounting is used to describe relationships signifi cantly which
          exist in between figures shown in a balance sheet, Profit & Loss A/c, Trading A/c, Budgetary


          control system or in any part of the accounting organization.”
                                     Figure 4.1: Structure of Ratios
















          According to Myers “Study of relationship among the various  financial factors of the
          enterprise”.


             Did u know? What is meant by the accounting ratio?
             The accounting ratios are computed on the basis available accounting information
             extracted from the fi nancial statements which are not in a position to reveal the status of
             the enterprise.
             The accounting ratios are applied to study the relationship in between the quantitative

             information available and to take decision on the financial performance of the fi rm.





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