Ratio analysis is the tool of Finance. With ratio analysis, we can check our financial position and revenue position. It is very helpful to analyze financial statement. It is also easy to understand and explain interpretations through these ratios.

Before discussing different ratios, you should understand the meaning of Ratio. Ratio is the relationship between two or more items of balance sheet or profit and loss account or both statements. For knowing short term position’s strength or liquidity, we can find current ratio, liquid ratio. These ratios tell us what is the amount of current assets, which is in the business if we take the burden of current liabilities. If amount of current assets will more the amount of current liabilities, then our liquidity position will strong. We can also calculate mixed ratios like inventory turnover ratio, debtor turnover ratio, creditor turnover ratio.

These ratios are very helpful to find following period

1. With inventory turnover ratio, we can calculate inventory conversion period. If this period is very short then it means we have power to sell our product fastly.

2. With debtor turnover ratio, we can calculate debtor conversion period, if this period is short then it means that we can convert over credit sale fastly into cash.

3. With creditor turnover ratio, we can calculate creditor conversion period, if this period is short, then it means we are ready fastly to reduce our current liabilities. This is plus point if our debtor conversion period will also short. if debtor conversion period is long, then shortness of creditor conversion period is our negative point.

We can  analyze of profitability by making gross profit ratio, operating ratio, net profit ratio and ROI ratio.We can also check our long term financial position’s strength or weakness by calculating debt-equity ratio, fixed asset and equity ratio, current asset and capital employed ratio. .

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