what are Principles of Ratio Selection....?
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Hi Rakesh, Your question is what are Principles of Ratio Selection....? Before we look into the Principles of Ratio Selection, let us first understand the meaning of ratio. A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. There can be various types of ratios based on nature of expenses: a) Operating ratios b) Financial ratios etc. Financial Ratios can be further sub-classfied as i) Profitability ratios ii) Efficiency ratios iii) Liquidity ratios etc. Financial ratios allow for comparisons a) between companies b) between industries c) between different time periods for one company d) between a single company and its industry average Ratios generally are not useful unless they are benchmarked against something else, like past performance or another company. Now let us understand what are Principles of Ratio Selection....? (1) Ratio should be logically inter-related. (2) Pseudo ratios should be avoided. (3) Ratio must measure a material factor of business. (4) Cost of obtaining information should be borne in mind. (5) Ratio should be in minimum numbers. (6) Ratio should be facilities comparable.
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