How to calculate ratio: A step-by-step guide with examples
A ratio is the relationship between two numbers or quantities. It's useful in a wide range of fields, especially business and finance. Analysing ratios can help Malaysian job seekers understand market trends and gain a competitive edge. Employers can also use ratios to make smarter hiring decisions. Explore how to calculate a ratio with practical examples.
The topics we'll cover include:
- Understanding ratios
- Basic steps to calculate a ratio
- Common types of ratios in business and finance
- Common types of ratios in human resources
- Calculating the recruiting cost ratio
- Interpreting and using ratios in decision-making
- Practical applications of ratio analysis in the Malaysian job market
- Tools and software for calculating ratios
- Common mistakes to avoid when calculating ratios
- Use ratios to make smarter job decisions
- FAQs
Understanding ratios
A ratio compares two or more numbers. It shows numbers' sizes or quantities in relation to one another. You can express it as a:b or a percentage.
A ratio uses division to compare two values. The antecedent is the number you are dividing. The consequent is the number you use to divide the antecedent.
Let's look at an example. The employment-to-population ratio in Malaysia was 63.159% in 2024. This means that about 63 out of 100 Malaysians are in employment. This information allows job seekers to determine the job market's competitiveness. It also helps employers analyse the availability of workers.
Basic steps to calculate a ratio
Follow these steps to calculate a ratio.
Identify the two quantities you want to compare
First, select two quantities of the same kind to compare. For instance, you could compare the number of jobs available and the number of job applicants.
Express the ratio in its initial form
Suppose there are 10 positions available and 200 job seekers. The easiest way to express this ratio is 10:200.
Reduce the ratio if possible
A ratio such as 10:200 has large numbers, but we can simplify it. First, identify the highest common factor of the two numbers, which is 10. Then, divide both numbers by 10. The simplified ratio is 1:20, meaning 20 job applicants are competing for one position.
Convert the ratio to a fraction or decimal if necessary
You can convert a ratio into a fraction or decimal. The ratio of 1:20 becomes 1/20 when expressed as a fraction. To turn a ratio into a decimal, simply divide the first number by the second number. The result is 0.05.
Common types of ratios in management and finance roles
Let's examine a few common types of finance and business ratios.
Profitability ratios
Profitability ratios indicate a project or department’s capability of generating profits from its operations. In management or finance roles, you may use profitability ratios, including profit margin, return on assets, and return on equity.
Liquidity ratios
Many finance roles will need to understand liquidity ratios. They show how well a company repays its short-term debts. Liquidity ratios include current, quick, and working capital. You may need to use these ratios to approve or decline projects or financing applications.
Efficiency ratios
Efficiency ratios are also known as activity ratios. They analyse a project or department’s efficiency in using its assets and liabilities. Inventory turnover, day's sales in inventory, and turnover ratios are examples of efficiency ratios. In management, you may need to oversee these ratios to ensure your project or department is efficient.
Common types of ratios in human resources
There are also ratios for evaluating recruitment process efficiency. These ratios can help Malaysian employers improve their hiring strategies. The following are some examples of recruitment ratios.
Selection ratio
The selection ratio compares the number of hires and the number of job applicants for a particular position. The lower the ratio, the more selective the hiring process. The selection ratio calculation formula divides the number of hires by the number of applicants.
Interview-to-offer ratio
The interview-to-offer ratio lets you know how many interviews an employer conducts to make a single job offer. To calculate this ratio, divide the number of interviews conducted by the number of offers made to see how many interviews it takes to secure one hire
Calculating recruiting cost ratio
The recruiting cost ratio (RCR) compares the total recruitment cost and the total compensation for new hires. This metric can help the human resources department improve the hiring process and lower their expenses. The RCR calculation formula is as follows.
- RCR = (external costs + internal costs) / total compensation of new hires x 100
Here's a breakdown of the formula:
- External costs: External costs include headhunter and agency fees, job postings, and candidate sourcing tools.
- Internal costs: These include advertising expenses, salaries and benefits of recruiters, and recruitment software.
- Total compensation for new hires: This includes newly hired employees' salaries, incentives, and benefits in their first year of employment.
Let's look at one of the simpler recruiting cost ratio calculating examples. Suppose the external costs amount to RM3,000 and the internal costs total RM5,000. Two new hires cost a total of RM60,000 after working for one year. So, the RCR is RM8,000 divided by RM60,000 multiplied by 100. That comes to 13.33%.
RCR is a crucial tool for Malaysian companies. A survey found that hiring managers in Malaysia are struggling with rising recruitment costs. This results from higher salaries, job posting costs, and recruitment agency fees.
Interpreting and using ratios in decision-making
Knowing how to calculate ratio isn't enough. Malaysian companies must also interpret and use ratios effectively to make the right decisions. What follows is a guide to this process.
Comparing ratios over time
Trend analysis is the process of assessing how financial ratios change over time. It enables an organisation to identify patterns and potential problems in its performance. This can help the company make better decisions about its prospects.
To accurately analyse trends, start by calculating financial ratios. Then, visualise the data to make it easier to evaluate the results. Interpreting the results involves identifying positive, negative, or neutral trends.
Benchmarking against industry standards
Determine how the current trend of the ratio compares to industry benchmarks. This helps in analysing its performance relative to competitors.
Understanding the limitations of ratio analysis
It's important to know that certain factors can impact the accuracy of ratio analysis. Consider including qualitative factors in the analysis. Such factors include market conditions, inflation, and seasonal effects. This can contribute to a more comprehensive and accurate evaluation.
For example, during inflation, there may be fewer full-time positions and more freelance or gig jobs to apply to. This may not have a significant impact on the unemployment rate in Malaysia. But it can mean there are fewer opportunities for those looking for full-time positions.
Practical applications of ratio analysis in the Malaysian job market
Below are some ways to apply ratio analysis to the Malaysian job market.
Job seekers can use employment ratios to understand market trends
Malaysian job seekers can use ratios to understand emerging trends in the job market. By analysing ratios, you can determine the competitiveness of a particular position or industry. This allows you to target the right jobs. Examples of useful employment ratios include the employment-to-population ratio and the salary-to-cost-of-living ratio.
Job seekers can understand how employers use ratio analysis to make hiring decisions
Ratio analysis can give job seekers an insight into employers' hiring strategies and decisions. It can also reveal the competitiveness of the positions they're applying for. Such knowledge allows them to customise their job applications to match specific roles. This can increase their likelihood of success. For instance, a low selection ratio suggests that a particular employer attracts a larger number of qualified applicants. So, job seekers need to make an extra effort to land a job with the company.
Tools and software for calculating ratios
You can use ratio calculating tools and software if you're looking for tips on how to calculate a ratio quickly. These tools can handle both small and large datasets.
Google Sheets and Excel are versatile tools that people use for ratio calculations. For complex calculations, consider getting Cube Software or Mark Fricker's Advanced Ratio Program. There are also specialised financial ratio analysis tools, such as Morningstar and Finviz. Compport or Factorial's human resources software programs are great tools for human resources professionals.
You can use basic salary calculators to perform ratio analysis. This allows you to look for suitable jobs and properly manage your finances. It also helps you understand how employers determine the market rates for specific roles. Examples of salary calculators in Malaysia include Jobstreet's salary calculator and Hays' salary checker.
Common mistakes to avoid when calculating ratios
Try to avoid making the following mistakes when calculating ratios.
Over-relying on a single ratio
Often, a single ratio can't give you a financial situation's full picture. Use several ratios or metrics across various categories to gain more comprehensive insights. These categories can be profitability, efficiency, or leverage.
Ignoring industry or regional differences
A ratio that's healthy in one industry or region can be unfavourable in another. For example, a high debt ratio is common in a capital-intensive industry but is a cause for concern in other sectors.
Mismatching time periods and units
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Using values with different units or data from different timeframes can lead to inaccurate ratio calculations. It can create a distorted picture of a company's financial position.
Failing to consider external factors
Ratios can fluctuate due to market conditions, seasonal changes, and inflation. Be sure to consider external factors when calculating ratios.
It's important for Malaysian job seekers to avoid these ratio analysis pitfalls. Misinterpreting ratios can result in poor decision-making in job searches.
Use ratios to make smarter job decisions
Knowing how to calculate ratios is a valuable skill for career success. This is especially true in finance, business, and human resources. You can practise ratio analysis and apply it to improve your job search efforts and career growth.
Malaysian employers are placing a greater emphasis on interpersonal skills, language skills, and certifications. You can use ratios to evaluate market trends and improve your job prospects. Ratio evaluation can help you make better decisions in many aspects of your professional life.
FAQs
Here's a list of common questions about ratio analysis.
- What are the most relevant ratios for job seekers in the Malaysian market?
Malaysian job seekers can use a variety of ratios to improve their job search. These include the employment-to-population and salary-to-cost-of-living ratios. - Are there any Malaysia-specific ratio calculation tools for job market analysis?
No, there aren't any notable Malaysia-specific ratio calculation tools for analysing the job market. However, basic salary calculators can provide insights into salary trends and market shifts. You can use Jobstreet's salary calculator to find the average salaries of various jobs in Malaysia. - How can I use ratios to compare multiple job offers?
You can use the salary-to-cost-of-living ratio to compare how far your salary will go in different locations. A higher ratio means better affordability and potentially better quality of life. - Can ratios help in evaluating freelance or gig jobs?
Yes, calculating your earnings-to-hours-worked ratio helps determine if a freelance role is worth your time compared to a fixed-salary job. - What ratio should I track to monitor my job search effectiveness?
The applications-to-interviews ratio tells you how many applications you submit before landing an interview. A high number may signal the need to improve your resume or target better-suited roles. - Is there a ratio that shows how well I perform in interviews?
Yes, the interview-to-offer ratio reflects how many interviews lead to job offers. A low ratio could indicate a need to sharpen your interview skills or better align with employer needs.