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Chapter 18

Calculating ratios

Ratios use simple calculations based upon the interactions within sets of data. For
example, changes in costs of sales are directly linked to changes in sales activity.
Changes in sales activity also have an effect upon wages and salaries, receivables,
inventory levels etc. Ratios allow us to see those interactions in a simple, concise
format.

Ratios are of limited use on their own – they need to be compared against a
benchmark of some sort (e.g. the equivalent ratio for the previous accounting period,
or that of a competitor). Therefore, the following points should serve as a useful
checklist if you need to analyse data and comment upon it:

 What does the ratio mean?

 What does a change in the ratio mean?

 What is the norm or expected ratio?

 What are the limitations of the ratio?

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