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A special cereal mixture contains rice, wheat and corn in the ratio of If a bag of the mixture contains 3 pounds of rice, how much corn does it contain? Write the items in the ratio as a fraction. Isolate variable x. Clothing store A sells T-shirts in only three colors: red, blue and green. The colors are in the ratio of 3 to 4 to 5. If the store has 20 blue T-shirts, how many T-shirts does it have altogether? Write the items in the ratios as fractions.

Please submit your feedback or enquiries via our Feedback page. Ratio problems are word problems that use ratios to relate the different items in the question. In these lessons, we will learn how to solve ratio word problems that involve three terms.

Example 2: Clothing store A sells T-shirts in only three colors: red, blue and green.Financial ratios can be a great tool in your analysis toolbox as an investor. It's important that you memorize the most important of these financial ratios. It helps to classify them into five major categories mentally.

Aspect Ratio: Which Should You Choose?

As useful as financial ratios are, they can't tell you everything. Imagine you were considering investing in a horse and buggy manufacturer when Henry Ford came out with the Model T. The historical income statement, balance sheet, and financial ratios wouldn't have told you what you needed to know as the business you were examining was on the brink of suffering a significant decline in income. On the other side, imagine looking at the incredibly ugly financials of what was then called Apple Computer, now just Apple, prior to the return of Steve Jobs from exile when he transformed the business he founded, taking it on a run that ended up resulting it in having the world's largest market capitalization.

Investing for Beginners Economics.

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By Full Bio Follow Twitter. Joshua Kennon co-authored "The Complete Idiot's Guide to Investing, 3rd Edition" and runs his own asset management firm for the affluent. Read The Balance's editorial policies.

Continue Reading.Financial ratios help you interpret the raw data of a company's finances to get a better picture of its performance. This will enable you to make prudent investment decisions, whether you're looking at blue chips or penny stocks.

There are five basic categories of financial ratios for stock market analysis; the information you can glean from them will put you at an advantage compared to investors who don't do their due diligence. Simply put, a financial ratio means taking one number from a company's financial statements and dividing it by another. The result allows you to measure the relationship between different numbers.

You can find many of these ratios calculated for you and displayed on financial websites. Different financial ratios give a picture of different aspects of a company's financial health, from how well it uses its assets to how well it can cover its debt. One ratio by itself may not give the full picture unless viewed as part of a whole.

Because they measure data that changes over time, ratios are by nature time-sensitive, so you should account for that when evaluating them. You can use this to your advantage and compare ratios from one time period to another to get an idea of a company's growth or changes over time.

Liquidity ratios demonstrate a company's ability to pay its debts and other liabilities. If it does not have enough short-term assets to cover short-term obligations, or it does not generate enough cash flow to cover costs, it may face financial problems.

Liquidity ratios are extra important with penny stocks specifically since the smaller and newer companies often have tremendous difficulties paying all of their bills before their businesses become stable and established. Some liquidity ratios include:. The current ratiofor example, is current assets divided by current liabilities, and it gives you an idea of how well the company can meet its obligations in the next 12 months.

### Types of Financial Ratios

The cash ratio will tell you the amount of cash a company has compared to its total assets. The quick ratio, also called the acid-test ratio, will compare a company's cash, marketable securities, and receivables against its liabilities, giving you a better picture of how well it can make payments on its current obligations.

Activity ratios demonstrate a company's efficiency in operations. In other words, you can see how well the company uses its resources, such as assets available, to generate sales. A few examples of activity ratios investors should apply in their research include:. Inventory turnover is expressed as the cost of goods sold for the year divided by average inventory. This ratio can indicate how efficient the company is at managing its inventory as it relates to its sales.

Receivables turnover, as another example, indicates how quickly net sales are turned into cash; it's expressed as net sales divided by average accounts receivable. Leverage, or solvency, ratios demonstrate a company's ability to pay its long-term debt. These ratios examine a company's dependence on debt for its operations and the likelihood it can repay its obligations.

Leverage ratios are also referred to as:. The debt ratio compares a business's debt to its assets as a whole. A debt-to-equity ratio looks at a company's overall debt as compared to its investor-supplied capital; with this ratio, a lower figure is generally safer although too low can indicate an excessively cautious, risk-averse company.

Interest-coverage ratios show how well a company can handle the interest payments on its debts. Performance ratios tell investors about a company's profit, which explains why they are frequently referred to as profitability ratios.

## Ratio Analysis Types

Performance ratios tell a clear picture of a company's profitability at various stages of its operations.Types of ratios in math :. Students who would like to learn ratio must be aware of the different kinds of ratios. Because, without knowing the kinds of ratios, always it is difficult to solve problems using ratios. Let us come to know the different types of ratios. Compound ratio :. The ratio compounded of the two ratios a : b and c : d is.

For example. Duplicate ratio :. A ratio compounded of itself is called its duplicate ratio. Triplicate ratio :. A ratio compounded of itself twice is called its triplicate ratio. Sub-duplicate ratio :. Sub-triplicate ratio :. Inverse ratio :. One ratio is the inverse of another, if their product is 1. Thus a : b is the inverse of b : a and vice— versa. Therefore, 3 : 4 and 4 : 3 are inverse to each other. Ratio of equality :. Ratio of inequality :. Ratio of greater inequality :.

Ratio of lesser inequality :. Continued ratio :. Ratio of in-commensurable quantities :. Related topics :. Ratio and proportion word problems. Ratio and proportion worksheets with answers.

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Ratio and proportion aptitude shortcuts pdf. Ratio and proportion problems and solutions for class 7.

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Ratio and proportion problems and solutions for class 6.The numerator and denominator of the ratio to be calculated are taken from the financial statements, thereby expressing a relationship with each other.

It is a fundamental tool that is used by every company to ascertain the financial liquidity, the debt burden, and the profitability of the company and how well it is placed in the market as compared to the peers.

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There are different types of ratios analysis that have been calculated by every company to evaluate business performance. Simply we may divide it as below:. This type of ratio analysis suggests the Returns that are generated from the Business with the Capital Invested.

It represents the operating profit of the company after adjusting the cost of the goods that are sold. The higher the gross profit ratio, the lower the cost of goods soldand the greater satisfaction for the management.

ROCE represents the profitability of the company with the capital invested in the business. This ratio represents the leverage of the company. A is an ideal debt-equity ratio to be maintained by any company. These ratios represent whether the company has enough liquidity to meet its short term obligations or not. Higher liquidity ratios more cash-rich the company. It represents the liquidity of the company in order to meet its obligations in the next 12 months.

Higher the current ratio, the stronger the company to pay its current liabilities. However, a very high current ratio signifies that a lot of money is stuck in receivables that might not realize in the future. It represents how cash-rich is the company to pay off its immediate liabilities in the short term. Theses ratios signify how efficiently the assets and liabilities of the company are used to generate revenue.

Fixed asset turnover represents the efficiency of the company to generate revenue from its assets. In simple terms, it is a return on the investment in fixed assets. The Inventory Turnover Ratio represents how fast the company is able to convert its inventory into sales. It is calculated in days signifying the time required to sell the stock on an average.

The average inventory is considered in this formula since the inventory of the company keeps on fluctuating throughout the year. Receivables Turnover Ratio reflects the efficiency of the company to collect its receivables. It signifies how many times the receivables are converted to cash. This ratio analysis type speaks about the returns that the company generates for its shareholders or investors. PE Ratio represents the earnings multiple of the company, the market value of the shares based on the pe multiple.

Earnings Per Share represents the monetary value of the earnings of each shareholder. It is one of the major components looked at by the analyst while investing in equity markets. The above mentioned are some of the ratios analysis types that can be used by the company for its financial analysis. In this way, ratio analysis is a very important tool for any kind of strategic business planning by the top management of the company.

This article has been a guide to Ratio Analysis Types. Here we discuss the top 5 types of ratio analysis, including profitability ratios, solvency ratiosliquidity ratios, turnover ratios, and earnings ratios, etc.

You can learn more about financing from the following articles —. Free Investment Banking Course. Login details for this Free course will be emailed to you.Ratios help an owner or other interested parties develop an understand the overall financial health of the company. Financial ratios are used by businesses and analysts to determine how a company is financed.

Ratios are also used to determine profitability, liquidity, and solvency. Liquidity is the firm's ability to pay off short term debts, and solvency is the ability to pay off long term debts. Liquidity ratios focus on a firm's ability to pay its short-term debt obligations. The information you need to calculate these ratios can be found on your balance sheet, which shows your assets, liabilities, and shareholder's equity.

Common liquidity ratios are the current ratio, the quick ratio, and the cash ratio. The current ratio is an indicator of your company's ability to pay its short term liabilities debts. The quick ratio sometimes called the acid-test is similar to the current ratio. The difference between the two is that in the quick ratio, inventory is subtracted from current assets.

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Since inventory is sold and restocked continuously, subtracting it from your assets results in a more precise visual than the current ratio.

The cash ratio is different from both the quick and current ratios in that it only takes into account assets that are the easiest to convert into cash.

These assets are cash and cash equivalents, such as marketable securities, money orders, or money in a checking account. The solvency ratio represents the ability of a company to pay it's long term obligations. This ratio compares your company's non-cash expenses and net income after taxes to your total liabilities short term and long term.

The financial leverage or debt ratios focus on a firm's ability to meet its long-term debt obligations. They use the firm's long-term liabilities on the balance sheet such as payable bonds, long-term loans, or pension funds.

Common financial leverage ratios are the debt to equity ratio and the debt ratio. Debt to equity refers to the amount of money and retained earnings invested in the company. The debt ratio indicates how much debt the firm is using to purchase assets.

In other words, it shows if the company uses debt or equity financing. Sometimes called asset efficiency ratios, turnover ratios measure how efficiently a business is using its assets. This ratio uses the information found on both the income statement and the balance sheet.

The turnover ratios used most commonly are accounts receivable turnover, accounts payable turnover, and inventory turnover. Accounts receivable turnover indicate how effective your company is at collecting credit debt. Accounts payable turnover expresses your efficiency at paying your accounts, and inventory turnover is a measurement of the amount of time it takes to consume and restock your inventory.

When used together, turnover ratios describe how well the business is being managed. They can indicate how fast the company's products are selling, how long customers take to pay, or how long capital is tied up in inventory.The ability to calculate and understand ratios in accounting helps managers and investors understand the financial structure of a company. Ratios are important in accounting and finance, because they can detect problems early. This allows managers to find solutions to financial issues.

The three main categories of ratios include profitability, leverage and liquidity ratios. Knowing the individual ratios in each category and the role they plan can help you make beneficial financial decisions concerning your future.

Investors and business managers use profitability ratios to see if a company earns more revenue than what it spends on expenses. Profitability ratios help reveal the segments of a business that are the most profitable. Several main financial ratios fall under the category of profitability ratios, including gross profit margin, return on assets and return on equity.

### What is a Ratio?

The gross profit margin analyzes how much of a profit a company makes on each sale. Leverage ratios show how much debt a company acquired. Leverage ratios focus more on long-term debt, while liquidity ratios deal with short-term debt.

The three main leverage ratios include the debt, debt-to-equity and interest-coverage ratios. If a company experiences a debt ratio greater than one, the company has more debt than assets on its balance sheet. The debt-to-equity ratio determines how much equity a company used to finance debts.

Companies with a small amount of debt usually experience a debt-to-equity ratio less than one. A company with a high interest-coverage ratio is in a better financial position than a company with a low interest-coverage ratio. Important liquidity ratios are the current, quick and cash ratios. The quick ratio is a more conservative version of the current ratio.

It uses a similar formula but does not include inventory in its calculation. The cash ratio determines the ability of a company to immediately pay for their current liabilities with liquid assets.