Ratio Analysis Meaning and Formula

Hello friends today we talk about few important ratio. With the help of ratio analysis you can easily take decision about the performance of any particular company and also compare your performance with other companies also. These ratios are distributed into different categories. There are few important ratios definition with formula is given below. Have a look.

Definition of Return on Investment Ratio analysis:

ROI stands for Return on Investment. The earning power of assets measured as the ratio of the net income (profit less depreciation) to the average capital employed (or equity capital) in a company or project. Knowing the ROI of your advertising and marketing campaigns helps you to identify which techniques are most effective in generating income for your business.

Must Read: How to remove or restore lines in reports of Tally ERP

Formula of ROI

ROI = (Profit before Interest, Tax & Dividend X 100)/ Capital Employed

Definition of Operating Ratio & Operating Cost:

A ratio that shows the efficiency of a company’s management by comparing operating expense to net sales. The operating ratio is calculated by dividing the operating expenses by the net sales. The smaller the ratio, the greater the organization’s ability to generate profit should revenues decrease.
Operating cost is equal to cost of goods sold plus operating expenses. Non-operating expenses such as interest charges, taxes etc. , are excluded from the computations.

Formula of Operating Ratio & Operating Cost

Operating Ratio          =        (Operating Cost X 100)/ Net Sales
Operating Cost            =          Cost of Goods Sold + Operating Expenses
Operating Ratio + Operating Profit Ratio = 1

Definition of Operating Profit Ratio:

This ratio is designed to give you an accurate idea of how much money you’re making on your primary business operations. It shows the percentage of each sales dollar remaining after all normal costs of operations.

Formula of Operating Profit Ratio

Operating Profit Ratio      =        (Operating Profit X 100)/ Net Sales
Operating Profit                 =          Gross Profit – Operating Expenses
OR
Operating Profit                  =          Net Profit + Non-Operating Expenses – Non Operating Income

Must Read: Definition of Net Profit Gross Profit and Current Ratios

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