Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The relevance of the ratio analysis formula lies in its ability to provide a quick and easy way to assess a company’s financial health and identify potential strengths and weaknesses. Using various ratio analysis formulas helps assess the subject company’s financial and operational ratio formulas position. Accounting ratios help you to decide on a particular position, investment period, or whether to avoid an investment altogether. Often, accounting ratios are calculated yearly or quarterly, and different ratios are more important to different industries. For example, the inventory turnover ratio would be significantly important to a retailer but with almost no significance to a boutique advisory firm.

The person on the left will get $5 and the person on the right will get $15. Both numbers add to make the total of $20 but $15 is three times larger than $5. A ratio table is a list containing the equivalent ratios of any given ratio in an ordered form.

## What is the Ratio Formula?

The inverse proportion describes the relationship between two quantities in which an increase in one quantity leads to a decrease in the other quantity. Similarly, if there is a decrease in one quantity, there is an increase in the other quantity. Therefore, the inverse proportion of two quantities, say “a” and “b” is represented by a∝(1/b). The direct proportion describes the relationship between two quantities, in which the increases in one quantity, there is an increase in the other quantity also. Similarly, if one quantity decreases, the other quantity also decreases.

The above concepts will help to find an unknown term if the two ratios that are in proportion are given. Thus, while writing a ratio, the two quantities should be the same type, and the units should be the same. Two or more ratios can be compared if they are reduced to their simplest forms. Here, we find the greatest common factor of the numbers in antecedent and consequent and divide them with the GCF. Maths ratio and proportion are used to solve many real-world problems.

## Unit 3: Ratios and rates

Many of us like to invest money that we look at as long- or short-term opportunities. A savvy investor knows how to use accounting ratios to determine whether a stock presents a lucrative opportunity or perhaps a liability that other investors have yet to realize. Ratios describe how to share out a given amount and are written with numbers separated by colons.

The amount of numbers in the ratio tells us how many groups the quantity is being shared between. The size of each number tells us the proportion of the total amount each group gets. Given a ratio, we can generate equivalent ratios by multiplying both the antecedent and consequent of the ratio by the same value. In certain situations, the comparison of two quantities by the method of division is very efficient. We can say that the comparison or simplified form of two quantities of the same kind is referred to as a ratio. This relation gives us how many times one quantity is equal to the other quantity.

## Ratios and Proportion

In such cases, the ratios are further reduced or simplified, similar to what we do in case of fractions. If we multiply and divide each term of ratio by the same number (non-zero), it doesn’t affect the ratio.

- The relevance of the ratio analysis formula lies in its ability to provide a quick and easy way to assess a company’s financial health and identify potential strengths and weaknesses.
- For example, the inventory turnover ratio would be significantly important to a retailer but with almost no significance to a boutique advisory firm.
- Here, “a” is called the first term or antecedent, and “b” is called the second term or consequent.
- The numerator (the first term) is called the antecedent and the denominator (the second term) is the consequent.
- Two or more ratios can be compared if they are reduced to their simplest forms.

Thus, if one quantity increases, the other will also increase and vice-versa. When two variables, x and y, are directly proportional, it is written as x ∝ y. To understand the concept of ratio and proportion, go through the difference between ratio and proportion given here. The definition of ratio and proportion is described here in this section. In real life also, you may find a lot of examples such as the rate of speed (distance/time) or price (rupees/meter) of a material, etc, where the concept of the ratio is highlighted. In this formula, “Total Revenue” represents all the money a company generates from its sales or services.

## Inverse Proportion

It is prepared by finding the equivalent ratios of any given ratio. Proportion is an equation that defines that the two given ratios are equivalent to each other. In other words, the proportion states the equality of the two fractions or the ratios. In proportion, if two sets of given numbers are increasing or decreasing in the same ratio, then the ratios are said to be directly proportional to each other. In our daily life, we use the concept of ratio and proportion such as in business while dealing with money or while cooking any dish, etc. Sometimes, students get confused with the concept of ratio and proportion.