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Chapter 19

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. Therefore, the following points should serve as
a useful checklist if you need to analyse data and comment on 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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