RATIO ANALYSIS

Meaning of Ratio:- A ratio is simple arithmetical expression of

the relationship of one number to another. It may be defined as
the indicated quotient of two mathematical expressions.
According to Accountant’s Handbook by Wixon, Kell and Bedford,
“a ratio is an expression of the quantitative relationship between
two numbers”.
Ratio Analysis:- Ratio analysis is the process of determining
and presenting the relationship of items and group of items in the
statements. According to Batty J. Management Accounting “Ratio
can assist management in its basic functions of forecasting,
planning coordination, control and communication”.
It is helpful to know about the liquidity, solvency, capital
structure and profitability of an organization. It is helpful tool to
aid in applying judgement, otherwise complex situations.
Ratio analysis can represent following three methods.
Ratio may be expressed in the following three ways :
1. Pure Ratio or Simple Ratio :- It is expressed by the
simple division of one number by another. For example , if
the current assets of a business are Rs. 200000 and its
current liabilities are Rs. 100000, the ratio of ‘Current assets
to current liabilities’ will be 2:1.
2. ‘Rate’ or ‘So Many Times :- In this type , it is calculated
how many times a figure is, in comparison to another figure.
For example , if a firm’s credit sales during the year are Rs.
200000 and its debtors at the end of the year are Rs. 40000
, its Debtors Turnover Ratio is 200000/40000 = 5 times. It
shows that the credit sales are 5 times in comparison to
debtors.
3. Percentage :- In this type, the relation between two
figures is expressed in hundredth. For example, if a firm’s
capital is Rs.1000000 and its profit is Rs.200000 the ratio of
 profit capital, in term of percentage, is 200000/1000000*100
= 20%
ADVANTAGE OF RATIO ANALYSIS
1. Helpful in analysis of Financial Statements.
2. Helpful in comparative Study.
3. Helpful in locating the weak spots of the business.
4. Helpful in Forecasting.
5. Estimate about the trend of the business.
6. Fixation of ideal Standards.
7. Effective Control.
8. Study of Financial Soundness.
LIMITATIONS OF RATIO ANALYSIS
1. Comparison not possible if different firms adopt
different accounting policies.
2. Ratio analysis becomes less effective due to price
level changes.
3. Ratio may be misleading in the absence of absolute
data.
4. Limited use of a single data.
5. Lack of proper standards.
6. False accounting data gives false ratio.
7. Ratios alone are not adequate for proper
conclusions.
8. Effect of personal ability and bias of the analyst.
CLASSIFICATION OF RATIO
Ratio may be classified into the four categories as follows:
A. Liquidity Ratio
a. Current Ratio
 b. Quick Ratio or Acid Test Ratio
B. Leverage or Capital Structure Ratio
a. Debt Equity Ratio
b. Debt to Total Fund Ratio
c. Proprietary Ratio
d. Fixed Assets to Proprietor’s Fund Ratio
e. Capital Gearing Ratio
f. Interest Coverage Ratio
C. Activity Ratio or Turnover Ratio
a. Stock Turnover Ratio
b. Debtors or Receivables Turnover Ratio
c. Average Collection Period
d. Creditors or Payables Turnover Ratio
e. Average Payment Period
f. Fixed Assets Turnover Ratio
g. Working Capital Turnover Ratio
D. Profitability Ratio or Income Ratio

(A) Profitability Ratio based on Sales :

a. Gross Profit Ratio
b. Net Profit Ratio
c. Operating Ratio
d. Expenses Ratio

(B) Profitability Ratio Based on Investment :

I. Return on Capital Employed
II. Return on Shareholder’s Funds :
a. Return on Total Shareholder’s Funds
b. Return on Equity Shareholder’s Funds
c. Earning Per Share
 d. Dividend Per Share
e. Dividend Payout Ratio
f. Earning and Dividend Yield
g. Price Earning Ratio
LIQUIDITY RATIO
(A) Liquidity Ratio:- It refers to the ability of the firm to meet
its current liabilities. The liquidity ratio, therefore, are also called
‘Short-term Solvency Ratio’. These ratio are used to assess the
short-term financial position of the concern. They indicate the
firm’s ability to meet its current obligation out of current
resources.
In the words of Saloman J. Flink, “Liquidity is the ability of the
firms to meet its current obligations as they fall due”.
Liquidity ratio include two ratio :-
a. Current Ratio
b. Quick Ratio or Acid Test Ratio
a. Current Ratio:- This ratio explains the relationship between
current assets and current liabilities of a business.
Formula:
Current Ratio = Current Assets/
Current Liabilities

Current Assets:-‘Current assets’ includes those assets which can

be converted into cash with in a year’s time.
Current Assets = Cash in Hand + Cash at Bank + B/R + Short
Term Investment + Debtors(Debtors – Provision) + Stock(Stock of
Finished Goods + Stock of Raw Material + Work in Progress) +
Prepaid Expenses.
Current Liabilities :- ‘Current liabilities’ include those liabilities
which are repayable in a year’s time.
Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation +
Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans
Payable with in a Year.
Significance :- According to accounting principles, a current ratio
of 2:1 is supposed to be an ideal ratio.
It means that current assets of a business should, at least , be twice of its current
liabilities. The higher ratio indicates the better liquidity position, the firm will be
able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicate
lack of liquidity and shortage of working capital.
The biggest drawback of the current ratio is that it is susceptible
to “window dressing”. This ratio can be improved by an equal
decrease in both current assets and current liabilities.
b. Quick Ratio:- Quick ratio indicates whether the firm is in a
position to pay its current liabilities with in a month or
immediately.
Formula:
Quick Ratio = Liquid Assets/ Current Liabilities

‘Liquid Assets’ means those assets, which will yield cash very
shortly.
Liquid Assets = Current Assets – Stock – Prepaid Expenses
Significance :- An ideal quick ratio is said to be 1:1. If it is more,
it is considered to be better. This ratio is a better test of short-
term financial position of the company.
LEVERAGE OR CAPITAL STRUCTURE RATIO
(B) Leverage or Capital Structure Ratio :- This ratio disclose
the firm’s ability to meet the interest costs regularly and Long
term indebtedness at maturity.
These ratio include the following ratios :
a. Debt Equity Ratio:- This ratio can be expressed in two
ways:
First Approach : According to this approach, this ratio
expresses the relationship between long term debts and
shareholder’s fund.
Formula:
Debt Equity Ratio=Long term Loans/Shareholder’s Funds or Net Worth

Long Term Loans:- These refer to long term liabilities which

mature after one year. These include Debentures, Mortgage Loan,
Bank Loan, Loan from Financial institutions and Public Deposits
etc.
Shareholder’s Funds :- These include Equity Share Capital,
Preference Share Capital, Share Premium, General Reserve,
Capital Reserve, Other Reserve and Credit Balance of Profit & Loss
Account.
Second Approach : According to this approach the ratio is calculated as follows:-
Formula:
Debt Equity Ratio=External Equities/internal Equities

Debt equity ratio is calculated for using second approach.

Significance :- This Ratio is calculated to assess the ability of the firm to meet its
long term liabilities. Generally, debt equity ratio of is considered safe.
If the debt equity ratio is more than that, it shows a rather risky financial position
from the long-term point of view, as it indicates that more and more funds invested
in the business are provided by long-term lenders.
The lower this ratio, the better it is for long-term lenders because they are more
secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection
to long-term lenders.
b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratio and
gives the same indication as the debt equity ratio. In the ratio, debt is expressed in
relation to total funds, i.e., both equity and debt.
Formula:
Debt to Total Funds Ratio = Long-term Loans/Shareholder’s funds + Long-term Loans

Significance :- Generally, debt to total funds ratio of 0.67:1 (or

67%) is considered satisfactory. In other words, the proportion of long term loans
should not be more than 67% of total funds.
A higher ratio indicates a burden of payment of large amount of interest charges
periodically and the repayment of large amount of loans at maturity. Payment of
interest may become difficult if profit is reduced. Hence, good concerns keep the
debt to total funds ratio below 67%. The lower ratio is better from the long-term
solvency point of view.
c. Proprietary Ratio:- This ratio indicates the proportion of total
funds provide by owners or shareholders.
Formula:
Proprietary Ratio = Shareholder’s Funds/Shareholder’s Funds + Long term loans
 Significance :- This ratio should be 33% or more than that. In
other words, the proportion of shareholders funds to total funds
should be 33% or more.
A higher proprietary ratio is generally treated an indicator of
sound financial position from long-term point of view, because
it means that the firm is less dependent on external sources of
finance.
If the ratio is low it indicates that long-term loans are less
secured and they face the risk of losing their money.
d. Fixed Assets to Proprietor’s Fund Ratio :- This ratio is
also know as fixed assets to net worth ratio.
Formula:
Fixed Asset to Proprietor’s Fund Ratio = Fixed Assets/Proprietor’s Funds (i.e., Net Worth)

Significance :- The ratio indicates the extent to which

proprietor’s (Shareholder’s) funds are sunk into fixed assets.
Normally , the purchase of fixed assets should be financed by
proprietor’s funds. If this ratio is less than 100%, it would mean
that proprietor’s fund are more than fixed assets and a part of
working capital is provided by the proprietors. This will indicate
the long-term financial soundness of business.
e. Capital Gearing Ratio:- This ratio establishes a relationship
between equity capital (including all reserves and undistributed
profits) and fixed cost bearing capital.
Formula:
Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixed cost Bearing
Capital
Whereas, Fixed Cost Bearing Capital = Preference Share Capital
+ Debentures + Long Term Loan
Significance:- If the amount of fixed cost bearing capital is
more than the equity share capital including reserves an
undistributed profits), it will be called high capital gearing and
if it is less, it will be called low capital gearing.
The high gearing will be beneficial to equity shareholders when
the rate of interest/dividend payable on fixed cost bearing
capital is lower than the rate of return on investment in
business.
Thus, the main objective of using fixed cost bearing capital is to
maximize the profits available to equity shareholders.
f. Interest Coverage Ratio:- This ratio is also termed as ‘Debt
Service Ratio’. This ratio is calculated as follows:
Formula:
Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges

Significance :- This ratio indicates how many times the interest

charges are covered by the profits available to pay interest
charges.
This ratio measures the margin of safety for long-term lenders.
This higher the ratio, more secure the lenders is in respect of
payment of interest regularly. If profit just equals interest, it is an
unsafe position for the lender as well as for the company also , as
nothing will be left for shareholders.
An interest coverage ratio of 6 or 7 times is considered
appropriate.
 ACTIVITY RATIO OR TURNOVER RATIO
(C) Activity Ratio or Turnover Ratio :- These ratio are calculated
on the bases of ‘cost of sales’ or sales, therefore, these ratio are also
called as ‘Turnover Ratio’. Turnover indicates the speed or number of
times the capital employed has been rotated in the process of doing
business. Higher turnover ratio indicates the better use of capital or
resources and in turn lead to higher profitability.
It includes the following :
a. Stock Turnover Ratio:- This ratio indicates the relationship
between the cost of goods during the year and average stock
kept during that year.
Formula:
Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Here, Cost of goods sold = Net Sales – Gross Profit

Average Stock = Opening Stock + Closing Stock/2
Significance:- This ratio indicates whether stock has been used
or not. It shows the speed with which the stock is rotated into
sales or the number of times the stock is turned into sales during
the year.
The higher the ratio, the better it is, since it indicates that stock
is selling quickly. In a business where stock turnover ratio is high,
goods can be sold at a low margin of profit and even than the
profitability may be quit high.
b. Debtors Turnover Ratio :- This ratio indicates the
relationship between credit sales and average debtors during
the year :
Formula:
Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R
While calculating this ratio, provision for bad and doubtful debts is
not deducted from the debtors, so that it may not give a false
impression that debtors are collected quickly.
Significance :- This ratio indicates the speed with which the
amount is collected from debtors. The higher the ratio, the better
it is, since it indicates that amount from debtors is being collected
more quickly. The more quickly the debtors pay, the less the risk
from bad- debts, and so the lower the expenses of collection and
increase in the liquidity of the firm.
By comparing the debtors turnover ratio of the current year with
the previous year, it may be assessed whether the sales policy of
the management is efficient or not.
c. Average Collection Period :- This ratio indicates the time
with in which the amount is collected from debtors and bills
receivables.
Formula:
Average Collection Period = Debtors + Bills Receivable / Credit Sales per day

Here, Credit Sales per day = Net Credit Sales of the year / 365
Second Formula :-
Average Collection Period = Average Debtors *365 / Net Credit Sales
Average collection period can also be calculated on the bases of ‘Debtors Turnover
Ratio’. The formula will be:
Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio

Significance :- This ratio shows the time in which the customers

are paying for credit sales. A higher debt collection period is thus,
an indicates of the inefficiency and negligency on the part of
management. On the other hand, if there is decrease in debt
collection period, it indicates prompt payment by debtors which
reduces the chance of bad debts.
d. Creditors Turnover Ratio :- This ratio indicates the
relationship between credit purchases and average creditors
during the year .
Formula:-
Creditors Turnover Ratio = Net credit Purchases / Average Creditors + Average B/P

Note :- If the amount of credit purchase is not given in the question, the ratio may
be calculated on the bases of total purchase.
Significance :- This ratio indicates the speed with which the
amount is being paid to creditors. The higher the ratio, the better
it is, since it will indicate that the creditors are being paid more
quickly which increases the credit worthiness of the firm.
d. Average Payment Period :- This ratio indicates the period
which is normally taken by the firm to make payment to its
creditors.
Formula:-
Average Payment Period = Creditors + B/P/ Credit Purchase per day

This ratio may also be calculated as follows :

Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio

Significance :- The lower the ratio, the better it is, because a

shorter payment period implies that the creditors are being paid
rapidly.
d. Fixed Assets Turnover Ratio :- This ratio reveals how
efficiently the fixed assets are being utilized.
Formula:-
Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets

Here, Net Fixed Assets = Fixed Assets – Depreciation

Significance:- This ratio is particular importance in
manufacturing concerns where the investment in fixed asset is
quit high. Compared with the previous year, if there is increase in
this ratio, it will indicate that there is better utilization of fixed
assets. If there is a fall in this ratio, it will show that fixed assets
have not been used as efficiently, as they had been used in the
previous year.
e. Working Capital Turnover Ratio :- This ratio reveals how
efficiently working capital has been utilized in making sales.
Formula :-
Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital

Here, Cost of Goods Sold = Opening Stock + Purchases +

Carriage + Wages + Other Direct Expenses - Closing Stock
Working Capital = Current Assets – Current Liabilities
Significance :- This ratio is of particular importance in non-
manufacturing concerns where current assets play a major role in
generating sales. It shows the number of times working capital
has been rotated in producing sales.
A high working capital turnover ratio shows efficient use of
working capital and quick turnover of current assets like stock and
debtors.
A low working capital turnover ratio indicates under-utilisation of
working capital.
Profitability Ratios or Income Ratios
(D) Profitability Ratios or Income Ratios:- The main object of
every business concern is to earn profits. A business must be able
to earn adequate profits in relation to the risk and capital invested
in it. The efficiency and the success of a business can be
measured with the help of profitability ratio.
Profitability ratios are calculated to provide answers to the
following questions:
i. Is the firm earning adequate profits?
ii. What is the rate of gross profit and net profit on sales?
 iii. What is the rate of return on capital employed in the firm?
iv. What is the rate of return on proprietor’s (shareholder’s)
funds?
v. What is the earning per share?
Profitability ratio can be determined on the basis of either sales
or investment into business.
(A) Profitability Ratio Based on Sales :
a) Gross Profit Ratio : This ratio shows the relationship
between gross profit and sales.
Formula :
Gross Profit Ratio = Gross Profit / Net Sales *100

Here, Net Sales = Sales – Sales Return

Significance:- This ratio measures the margin of profit available
on sales. The higher the gross profit ratio, the better it is. No ideal
standard is fixed for this ratio, but the gross profit ratio should be
adequate enough not only to cover the operating expenses but
also to provide for deprecation, interest on loans, dividends and
creation of reserves.
b) Net Profit Ratio:- This ratio shows the relationship between
net profit and sales. It may be calculated by two methods:
Formula:
Net Profit Ratio = Net Profit / Net sales *100
Operating Net Profit = Operating Net Profit / Net Sales *100
Here, Operating Net Profit = Gross Profit – Operating Expenses such as Office and
Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts,
Interest on short-term debts etc.
Significance :- This ratio measures the rate of net profit earned on sales. It helps in
determining the overall efficiency of the business operations. An increase in the
ratio over the previous year shows improvement in the overall efficiency and
profitability of the business.
(c) Operating Ratio:- This ratio measures the proportion of an enterprise cost of
sales and operating expenses in comparison to its sales.
Formula:
Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100

Where, Cost of Goods Sold = Opening Stock + Purchases +

Carriage + Wages + Other Direct Expenses - Closing Stock
Operating Expenses = Office and Administration Exp. + Selling
and Distribution Exp. + Discount + Bad Debts + Interest on Short-
term loans.
‘Operating Ratio’ and ‘Operating Net Profit Ratio’ are inter-related. Total of both
these ratios will be 100.
Significance:- Operating Ratio is a measurement of the
efficiency and profitability of the business enterprise. The ratio
indicates the extent of sales that is absorbed by the cost of goods
sold and operating expenses. Lower the operating ratio is better,
because it will leave higher margin of profit on sales.
(d) Expenses Ratio:- These ratio indicate the relationship
between expenses and sales. Although the operating ratio reveals
the ratio of total operating expenses in relation to sales but some
of the expenses include in operating ratio may be increasing while
some may be decreasing. Hence, specific expenses ratio are
computed by dividing each type of expense with the net sales to
analyse the causes of variation in each type of expense.
The ratio may be calculated as :
(a) Material Consumed Ratio = Material Consumed/Net Sales*100
(b) Direct Labour cost Ratio = Direct labour cost / Net sales*100
(c) Factory Expenses Ratio = Factory Expenses / Net Sales *100
(a), (b) and (c) mentioned above will be jointly called cost of
goods sold ratio.
It may be calculated as:
Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100
(d) Office and Administrative Expenses Ratio = Office and
Administrative Exp./
Net Sales*100
(e) Selling Expenses Ratio = Selling Expenses / Net Sales *100
(f) Non- Operating Expenses Ratio = Non-Operating Exp./Net
sales*100

Significance:- Various expenses ratio when compared with the

same ratios of the previous year give a very important indication
whether these expenses in relation to sales are increasing,
decreasing or remain stationary. If the expenses ratio is lower, the
profitability will be greater and if the expenses ratio is higher, the
profitability will be lower.
(B) Profitability Ratio Based on Investment in the
Business:-
These ratio reflect the true capacity of the resources employed in the enterprise.
Sometimes the profitability ratio based on sales are high whereas profitability ratio
based on investment are low. Since the capital is employed to earn profit, these
ratios are the real measure of the success of the business and managerial efficiency.
These ratio may be calculated into two categories:
I. Return on Capital Employed
 II. Return on Shareholder’s funds
I. Return on Capital Employed :- This ratio reflects the overall
profitability of the business. It is calculated by comparing the
profit earned and the capital employed to earn it. This ratio is
usually in percentage and is also known as ‘Rate of Return’ or
‘Yield on Capital’.
Formula:
Return on Capital Employed = Profit before interest, tax and dividends/
Capital Employed *100

Where, Capital Employed = Equity Share Capital + Preference

Share Capital + All Reserves + P&L Balance +Long-Term Loans-
Fictitious Assets (Such as Preliminary Expenses OR etc.) – Non-
Operating Assets like Investment made outside the business.
Capital Employed = Fixed Assets + Working Capital
Advantages of ‘Return on Capital Employed’:-
 Since profit is the overall objective of a business enterprise, this
ratio is a barometer of the overall performance of the enterprise.
It measures how efficiently the capital employed in the business
is being used.
 Even the performance of two dissimilar firms may be compared
with the help of this ratio.
 The ratio can be used to judge the borrowing policy of the
enterprise.
 This ratio helps in taking decisions regarding capital investment
in new projects. The new projects will be commenced only if the
 rate of return on capital employed in such projects is expected
to be more than the rate of borrowing.
 This ratio helps in affecting the necessary changes in the
financial policies of the firm.
 Lenders like bankers and financial institution will be determine
whether the enterprise is viable for giving credit or extending
loans or not.
 With the help of this ratio, shareholders can also find out
whether they will receive regular and higher dividend or not.
II. Return on Shareholder’s Funds :-
Return on Capital Employed Shows the overall profitability of the funds supplied
by long term lenders and shareholders taken together. Whereas, Return on
shareholders funds measures only the profitability of the funds invested by
shareholders.
These are several measures to calculate the return on
shareholder’s funds:
(a) Return on total Shareholder’s Funds :-
For calculating this ratio ‘Net Profit after Interest and Tax’ is
divided by total shareholder’s funds.
Formula:
Return on Total Shareholder’s Funds = Net Profit after Interest and Tax / Total Shareholder’s
Funds

Where, Total Shareholder’s Funds = Equity Share Capital +

Preference Share Capital + All Reserves + P&L A/c Balance –
Fictitious Assets
Significance:- This ratio reveals how profitably the proprietor’s
funds have been utilized by the firm. A comparison of this ratio
with that of similar firms will throw light on the relative
profitability and strength of the firm.
(b) Return on Equity Shareholder’s Funds:-
Equity Shareholders of a company are more interested in
knowing the earning capacity of their funds in the business. As
such, this ratio measures the profitability of the funds belonging
to the equity shareholder’s.
Formula:
Return on Equity Shareholder’s Funds = Net Profit (after int., tax & preference dividend) /
Equity Shareholder’s Funds *100

RATIO ANALYSIS
Where, Equity Shareholder’s Funds = Equity Share Capital + All
Reserves + P&L A/c
Balance – Fictitious Assets
Significance:- This ratio measures how efficiently the equity
shareholder’s funds are being used in the business. It is a true
measure of the efficiency of the management since it shows what
the earning capacity of the equity shareholders funds. If the ratio
is high, it is better, because in such a case equity shareholders
may be given a higher dividend.
(c) Earning Per Share (E.P.S.) :- This ratio measure the profit
available to the equity shareholders on a per share basis. All profit
left after payment of tax and preference dividend are available to
equity shareholders.
Formula:
Earning Per Share = Net Profit – Dividend on Preference Shares / No.
of Equity Shares
Significance:- This ratio helpful in the determining of the market
price of the equity share of the company. The ratio is also helpful
in estimating the capacity of the company to declare dividends on
equity shares.
(d) Dividend Per Share (D.P.S.):- Profits remaining after
payment of tax and preference dividend are available to equity
shareholders.
But of these are not distributed among them as dividend . Out of
these profits is retained in the business and the remaining is
distributed among equity shareholders as dividend. D.P.S. is the
dividend distributed to equity shareholders divided by the number
of equity shares.
Formula:
D.P.S. = Dividend paid to Equity Shareholder’s / No. of Equity Shares
*100

(e) Dividend Payout Ratio or D.P. :- It measures the

relationship between the earning available to equity shareholders
and the dividend distributed among them.
Formula:

D.P. = Dividend paid to Equity Shareholders/ Total

 Net Profit belonging to Equity Shareholders*100
OR
D.P. = D.P.S. / E.P.S. *100

(f) Earning and Dividend Yield :- This ratio is closely related to

E.P.S. and D.P.S. While the E.P.S. and D.P.S. are calculated on the
basis of the book value of shares, this ratio is calculated on the
basis of the market value of share
(g) Price Earning (P.E.) Ratio:- Price earning ratio is the ratio
between market price per equity share & earnings per share. The
ratio is calculated to make an estimate of appreciation in the
value of a share of a company & is widely used by investors to
decide whether or not to buy shares in a particular company.
Significance :- This ratio shows how much is to be invested in the market in this
company’s shares to get each rupee of earning on its shares. This ratio is used to
measure whether the market price of a share is high or low.