Mathematical relationship between one quantity and another. There are many categories of ratios such as those that evaluate a business entity's liquidity, solvency, return on investment, operating performance, asset utilization, and market measures. An example of a ratio is the earnings yield that equals dividends per share divided by market price per share. Whereas the computation of a ratio is a basic arithmetical operation, its analytical interpretation is more complex. A financial ratio should be computed only if the relationship between accounts or categories has significance. The financial ratio may provide the accountant with clues and symptoms of underlying financial condition. To be meaningful, a given financial ratio of a company for a given year must be compared with (1) prior years to examine the trend, (2) industry norm, and (3) competing companies.
See also financial statement analysis.
Dictionary of Accounting Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
