ratio

(noun)

The relative magnitudes of two quantities (usually expressed as a quotient).

Related Terms

Examples of ratio in the following topics:

  • Performance per Share

    • Valuation ratios describe the value of shares to shareholders, and include the EPS ratio, the P/E ratio, and the dividend yield ratio.
    • Price to Earnings (P/E) ratio relates market price to earnings per share.
    • A higher P/E ratio means that investors are paying more for each unit of net income; therefore, the stock is more expensive compared to one with a lower P/E ratio.
    • P/E Ratio = Market Price Per Share / Annual Earnings Per Share .
    • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends: Dividend Payout Ratio = Dividends / Net Income for the Same Period.

  • Debt Utilization Ratios

    • In this case, it has a debt ratio of 200%.
    • The debt ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt.
    • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
    • The debt service coverage ratio (DSCR), also known as debt coverage ratio (DCR), is the ratio of cash available for debt servicing to interest, principal, and lease payments.
    • A similar debt utilization ratio is the times interest earned (TIE), or interest coverage ratio.

  • Liquidity Ratios

    • One such ratio is known as the current ratio, which is equal to:
    • Acceptable current ratios vary from industry to industry.
    • The acid test ratio (or quick ratio) is similar to current ratio except in that it ignores inventories.
    • Typically the quick ratio is more meaningful than the current ratio because inventory cannot always be relied upon to convert to cash.
    • A ratio of 1:1 is recommended.

  • Activity Ratios

    • Company N, on the other hand, has a DSO ratio of five days.
    • Activity ratios (or efficiency ratios) are used to measure the effectiveness of a firm's use of resources .
    • Days Sales Outstanding (DSO) Ratio is similar to the average collection period.
    • Generally speaking, the higher the ratio the better—a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue.
    • Explain the ways to use activity ratios to measure a firm's efficiency

  • Profitability Ratios

    • Profitability ratios are used to assess a business's ability to generate earnings.
    • Other profitability ratios include:
    • Profit Margin: The profit margin is one of the most used profitability ratios.
    • The profit margin ratio is broadly the ratio of profit to total sales times one hundred percent.
    • Basic Earning Power Ratio: The basic earning power ratio (or BEP ratio) compares earnings separately from the influence of taxes or financial leverage to the assets of the company.

  • Sample Evaluation

    • BEP Ratio = EBIT / Total Assets = 1,810/13,840 = 0.311
    • Current Ratio = Current Assets / Current Liabilities = 5,240/3,500 = 1.497
    • Despite having a current ratio of about 1.0, the quick ratio is slightly below 1.0.
    • Debt Ratio = Total Debt / Total Assets = 6,500/13,840 = 47 percent
    • The higher the ratio, the greater risk will be associated with the firm's operation.

  • Comparisons Within an Industry

    • Ratios of risk such as the current ratio, the interest coverage, and the equity percentage have no theoretical benchmarks.
    • Similarly, if the equity ratio increases over time, it is a good sign in relation to insolvency risk.
    • Ratios must be compared with other firms in the same industry to see if they are in line .
    • Ratio analyses can be used to compare between companies within the same industry.
    • For example, comparing the ratios of BP and Exxon Mobil would be appropriate, whereas comparing the ratios of BP and General Mills would be inappropriate.

  • The Reserve Requirement

    • Suppose that the Fed sets the reserve ratio at 10% for net transaction accounts between $6 million and $15 million.
    • The Federal Reserve can adjust reserve requirements by changing required reserve ratios, the liabilities to which the ratios apply, or both.
    • Unless it is accompanied by an increase in the supply of Federal Reserve balances, an increase in reserve requirements (through an increase in the required reserve ratio, for example) reduces excess reserves, induces a contraction in bank credit and deposit levels, and raises interest rates.

  • Equity Theory

    • Equity theory states that perceptions of equality in the input/outcome ratio of employees determines their relative job satisfaction.
    • An individual will consider that he is treated fairly if he perceives the ratio of his inputs to his outcomes to be equivalent to those around him .
    • When the ratio of inputs to outcomes is close, then the employee should be very satisfied with their job.
    • Ratio of one individual's outputs to inputs is perceived as equal to that of another individual in comparison.

  • Executive Compensation

    • The ratio of CEO pay to average worker pay is far greater in the U.S. compared with other countries.
    • In Japan, the ratio of CEO pay to average worker pay is 11:1; in Italy, it is 20:1; in Britain, it is 22:1; in Mexico, it is 47:1; and in the U.S., the ratio is 475:1.
    • As of 20120, the current ratio of CEO pay to average worker pay was: