What is Ratio Analysis in Accounting?

Uday Gehani
A free video tutorial from Uday Gehani
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Accounting Basics for Success in Business and in Life!

Understand Bookkeeping, Accounting, Financial Statements & Ratio Analysis in this easy to follow course.

05:02:31 of on-demand video • Updated April 2020

  • You will BUILD A SOLID FOUNDATION IN UNDERSTANDING BUSINESS by learning the Basics of Accounts.
  • You will LEARN TO READ FINANCIAL STATEMENTS to assess the health of any Business.
  • You will understand how the Income Statement, Balance Sheet and Cash Flow Statement work and tie in together.
  • You will learn about common Entrepreneurial mistakes - such as not understanding the difference between Profits and Cash Flow which drain an Entrepreneurs Resources.
  • You will learn practical strategies which can be used to REACH BUSINESS GOALS FASTER.
  • You will learn 'Accounting Jargon' and 'Real Life Business Examples' making you a better Investor.
  • You will have a complete 'Paradigm shift' in how you view business making you understand the world of Business better.
  • You will learn the Basics of Bookkeeping and how to use free Accounting Software to manage Accounts
  • You will learn about RATIO ANALYSIS & FINANCIAL RATIOS to help you get quick & insightful information about companies.
English [Auto] One of my favorite supervillains is the Riddler. You know from Batman. Now if you don't know who the red line is what in the world are you doing buddy. Stop this lecture series right now and go watch a Batman movie. That stuff is pretty important you know. But if you do know who the Riddler is you can continue and find out what the Riddler has to do with racial analysis. Hi there and welcome to our deep dive into racial analysis. So let's start by asking this question What's the ratio. Well if you're familiar with some basic math then you probably already know that simply put financial racial means taking one number and dividing it by another. There are hundreds of financial ratios you can calculate with your financial statements because after all they're just division problems. But what's the point. Well in the context of business here's what the racial analysis can do. It allows you grouping big numbers taken from companies financial statements divide them together and gain insights into a business's performance. How cool is that. Let me show you what I mean. Let's say Martians compute a sharp eyed a hundred thousand dollars in current assets and fifty thousand dollars and current liabilities by the end of your 2021 you can take the hundred thousand and current assets and divided by the fifty thousand and current liabilities and you come up with the number two. Now this means that the business has two times the number of current assets was its current liabilities. I'll put another way the business has two dollars and current assets for every one dollar of current liability. This is so important. Let me repeat it. The number two signifies that the business has two dollars in current assets for every one dollar of current liability. Well now in your head you may think that the business is doing great but the Sherlock Holmes that you are you know that things are not always what they seem at the surface. And you obviously decide to investigate this further. So you look at the last year financial statements and look at the current assets of hundred and forty five thousand and you divided by the current liabilities of 60000 and you come up with the number two point four two. In comparison the current ratio for 2021 doesn't look so great. Why. Because you notice that the current ratio decline in 2020. You had two point four one dollars for every dollar in current liabilities. Now you only have two. So what happened. Why did the current ratio go down. Well the current assets fell in comparison to current liabilities. But the question is why did the cash balance decline current assets. If so why did the company take on some sort of short term debt and increase its current liabilities. If so why. What did the company use the cash for. Did you use it to increase expenses or did you use it to invest in another asset which would bring the company more money in the future. See how many questions. Let's say it is just a simple drop in a number raised. So like the great super villain the Riddler the object of a good ratio analysis is not only to do the math but to raise questions questions which you need to answer. Now we have only spoken number one ratio as an example but imagine doing that with dozens of ratios taken a step further. You can then compare a company's current ratio to its direct competitors or even larger corporations for greater insight. This technique provides you superpowers and increases your understanding of any business it can make all the difference in your analysis understanding of any business improving your investment results and often much more clarity to your decisions. That's how you get to understand the inner workings of a company to racial analysis and that's the topic of the section. And to put your mind at ease looking into many of these ratios involve some work but you can find many of them calculated for you and displayed on several major online financial portals. I will walk you through some of my favorite online sources later in this section. But first I want you to learn more about racial analysis. This will put you at an advantage to other people who don't put the work in. So thank you so much for joining me in this lecture. I will see you in the next 1.