ISSUE #2: RATIO
This week we will be looking at the term “Ratio”. Let’s get right into it.
The term “ratio” has Latin origins. English records show that the term “ratio” was first used as a part of the English language in the 1630s meaning “reason, rationale, reasoning, judgment, understanding”. This has its roots in the Latin word rērī which means to think, to reason. Lawyers, you remember ratio decidendi? Yeah, that is it.
The term ratio in Latin also means “reckoning, numbering, calculation, business action, procedure.” This is how the term was used in mathematical endeavours and in financial and market transactions. The usage in a mathematical and financial sense did not find expression in the English language until around mid-17th Century. It is with this mathematical and financial use that we will be focused on in this issue of Finance “Yoga”.
The term ratio is a noun. It means the relationship between two or more groups or amounts- usually two groups, expressed by two or more numbers or a percentage, expressing how much bigger one is than the other.
Breaking it down, ratio means:
- The relationship between two or more amounts.
- Expressed by two or more numbers or a percentage.
- Expressing how much bigger one is than the other.
For example, we can say:
“The ratio of exports to imports have also improved in the country by 70.4% to 83.2%.”
“The ratio of women to men at the NBA Conference was two to one/2:1”.
This means that there were more women than men at the NBA Conference. Don’t mind me, we are all gentlemen at the Bar. LOL!
And yes, this is NBA Conference week. Yippee!
I hope this is clear enough? Okay, let’s move on.
In a stricter finance sense, when we talk of ratio we are also referring to financial ratios.
Financial ratios may be defined as financial analysis comparison in which certain financial statement terms are divided by one another to reveal their logical relationships. They are created with the use of numerical values taken from financial statements to gain meaningful information about a company.
Financial ratios are used to track the performance of a company and also to make comparative judgments regarding the performance of the company.
Financial ratios are grouped basically into five categories:
Liquidity ratios: They are financial ratios that measures a company’s ability to repay both short and long-term obligations.
Leverage ratios: They are used to evaluate a company’s debt levels. It measures the amount of capital that comes from debts.
Efficiency ratios: Also know as activity financial ratios, they are used to measure how well a company is utilising its assets and resources.
Profitability ratios: They are used to assess a company’s ability to generate income relative to revenue, balance sheet assets, operating costs and equity.
Market value ratios: They are used to assess the share price of company’s stock.
Financial ratios are , thus, used to evaluate a business entity’s liquidity, solvency, return on investment (ROI), operating performance, asset utilisation and market measures. The above categories are just broad-strokes, they also have ratio babies inside of them. You can do a little research to learn more.
Now, we can say for example;
“I looked into the financial ratios of the company to see how everything was going and I was surprised what I found.”
“The company was performing well according to all key ratios.”
You see, finance is not that hard.
This is the end of this week’s issue of Finance “Yoga”. Do not forget to send feedbacks. They are important.
Remember, finance is not that hard.
See you next week!
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