While studying mathematics, we come across new concepts of comparing two more quantities with the same unit. In general terms, we consider the numerical values of the quantities and compare them. By performing a ratio between the terms, we can easily understand the outcome of the comparison. For this, we have framed a ratio formula for different techniques of comparison. In this section, we will study how a ratio between two quantities is determined and how we can use this concept to design various types of ratio formulas.
What is a Ratio?
A ratio is the comparison of two quantities of the same kind that helps to compare them easily. This is how we express a fraction where a numerator is compared to a denominator. The definition of numerator and denominator depends on the formula of a ratio used in different aspects of a mathematical calculation. For instance, a simple ratio between the profit margin and the cost price of a product is (profit : cost). When we multiply it by 100, we get the profit percentage.
In this way, the quick ratio formula is also formulated by using the concept and the terms associated with it. The formula is:
Quick Ratio = (Current assets – Inventory)/Current liabilities
This is how the rest of the ratio formulas are determined. The definition is properly studied and the relation between the terms is determined to form a ratio formula.
How a Ratio Formula is Determined?
The first method of comparison a student learns in mathematics is by forming a ratio. He is provided with a set of information where the same physical quantity is available in two different forms. For instance, Ram has 3 mangoes and Ashok has 5 mangoes. If we want to compare the number of mangoes owned by these two kids, we can form a ratio (3 : 5). In this way, other ratio formulas are also formed. You have already learned what the quick ratio formula stands for. Let us consider a few technical examples here.
Return on Equity Formula
This ratio formula is used by the commerce students in their advanced subjects. The return on equity formula is:
Return on Equity (ROE) = Net income/shareholder’s equity
Net Profit Margin Formula
This formula is one of the most common formulas you have studied in previous classes. Learn the definition of the terms used in the net profit margin formula.
Net Profit Margin = (Revenue – Cost)/Revenue
Debt Ratio Formula
The debt ratio formula is also called the debt-to-equity formula. It is used in the commerce subjects to calculate the ratio of debts to assets. The formula is
Debt Ratio = total debts/total assets
Gearing Ratio Formula
There are different kinds of gearing ratios used in the companies to understand the current financial conditions. In this section, you will study different types of gearing ratios such as debt to equity ratio, equity ratio, debt ratio, debt to capital ratio, etc.