Financial Data of any business organization is always reported in Comparative form, i.e. Data of the current period along with the similar data of other corresponding period. This is because financial data becomes meaningful only if it is compared with the data of similar type. For example, stand-alone figure of Sales for a moth will not reveal any information, but Sales of two consecutive months are reported, one can conclude how the Organization is doing in the current month “as compared” to the previous month. Similarly Sales of one company can be compared with those of another company to judge their performances.
This comparison becomes more meaning ful if instead of Absolute figures, relative figures like (%)age is also given.
To make analysis useful for any decision, data can be compared
- With the data of Previous year to show % age Growth/decline
- Data of One product along with the data of another product
- Data of one Product along with data of the entire Sales
- Sales are compared with Receivables
- Sales are compared with Bank Borrowings
- Sales are compared with Net Profit or Gross Profit
Such comparative study is known as Ratio Analysis. These ratios indicate
- Efficiency of the Plant
- Debt serving ability
- Debt repaying capacity
We have explained various Accounting and costing ratios on our Website and have provided the calculating tools for the reader. One can calculate the ratios and download them in .pdf format for his future reference