By Admin 05 Apr, 2025
Ratio Analysis is one of the most crucial and frequently asked topics in the **UGC NET Commerce syllabus**. Whether you're aiming for JRF or just clearing NET, mastering ratio analysis can give you an edge in both Paper 2 (Commerce) and paper-based research/data interpretation questions.
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What is Ratio Analysis?
Ratio Analysis is a quantitative tool used to evaluate a company’s financial performance by comparing relationships between various financial statement items. These ratios help stakeholders—investors, creditors, and management—make informed decisions.
It involves calculations based on figures from:
- Balance Sheet
- Profit and Loss Account
- Cash Flow Statement
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Objectives of Ratio Analysis
1. Performance Evaluation
It helps assess profitability, liquidity, efficiency, and solvency.
2. Trend Analysis
Analysts use ratios to compare performance over different periods.
3. Inter-Firm Comparison
Ratios allow us to benchmark a company against competitors or industry standards.
4. Simplification of Financial Data
Ratios convert complex numbers into simple, understandable forms.
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Types of Financial Ratios (UGC NET Important)
1. Liquidity Ratios
These indicate the firm’s ability to meet short-term obligations.
| Ratio | Formula | Ideal |
|-------|---------|-------|
| **Current Ratio** | Current Assets / Current Liabilities | 2:1 |
| **Quick Ratio** | (Current Assets – Inventory) / Current Liabilities | 1:1 |
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2. Solvency Ratios (Long-term financial position)
| Ratio | Formula | Interpretation |
|-------|---------|----------------|
| **Debt to Equity Ratio** | Total Debt / Shareholders’ Equity | Lower = Better |
| **Interest Coverage Ratio** | EBIT / Interest | Higher = Better |
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3. Profitability Ratios
| Ratio | Formula | Significance |
|-------|---------|--------------|
| **Gross Profit Ratio** | (Gross Profit / Net Sales) × 100 | Shows production efficiency |
| **Net Profit Ratio** | (Net Profit / Net Sales) × 100 | Reflects overall profitability |
| **Return on Equity (ROE)** | Net Profit / Equity | Return to shareholders |
| **Return on Capital Employed (ROCE)** | EBIT / Capital Employed | Efficiency in capital use |
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4. Activity Ratios (Efficiency ratios)
| Ratio | Formula | Use |
|-------|---------|-----|
| **Inventory Turnover** | COGS / Average Inventory | Stock management |
| **Debtors Turnover** | Net Credit Sales / Average Debtors | Collection efficiency |
| **Asset Turnover** | Net Sales / Total Assets | Asset utilization |
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Tips for UGC NET Preparation
1. **Memorize Key Formulas**
Many MCQs in Paper 2 test direct formula application.
2. **Practice Numericals**
Solve previous year questions and mock tests involving real data.
3. **Conceptual Clarity**
Know *why* a ratio is used, not just the *how*.
4. **Use Flashcards**
Handy for revising formulas on the go.
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Past Year UGC NET Question Examples
> **Q**: A company has a current ratio of 2:1. If its current liabilities are ₹50,000, what are its current assets?
> **A**: Current Assets = 2 × 50,000 = ₹1,00,000
> **Q**: If EBIT is ₹2,00,000 and interest is ₹50,000, calculate interest coverage ratio.
> **A**: ICR = 2,00,000 / 50,000 = **4 times**
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Final Thoughts
Ratio Analysis isn't just a theory topic—it’s a practical tool used across finance, accounting, and business strategy. For UGC NET Commerce aspirants, building command over this area will not only help in qualifying the exam but also in future academic research and teaching.
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