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Accounting Ratios

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misha bansal
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50 views

Accounting Ratios

Uploaded by

misha bansal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Accounting ratios are key tools used in financial analysis to evaluate a company's

performance, e9iciency, and financial health. These ratios can be broadly categorized
into several types, each providing insights into di9erent aspects of the company's
operations. Here are some of the most common accounting ratios:

1. Liquidity Ratios

These ratios measure a company's ability to meet its short-term obligations.

Current Ratio: Current Assets / Current Liabilities

Indicates whether the company has enough short-term assets to cover its short-term
liabilities.

Quick Ratio (Acid-Test Ratio): (Current Assets - Inventory) / Current Liabilities

Provides a stricter measure of liquidity by excluding inventory from current assets.

2. Profitability Ratios

These ratios assess a company's ability to generate profit relative to its sales, assets, or
equity.

Gross Profit Margin: (Gross Profit / Net Sales) * 100

Shows the percentage of revenue that exceeds the cost of goods sold.

Net Profit Margin: (Net Profit / Net Sales) * 100

Indicates the percentage of revenue that remains as profit after all expenses.

Return on Assets (ROA): (Net Income / Total Assets) * 100

Measures how e9ectively a company uses its assets to generate profit.

Return on Equity (ROE): (Net Income / Shareholders' Equity) * 100

Assesses how well the company generates profit from its shareholders' investments.

3. Leverage Ratios

These ratios evaluate the extent of a company's financial leverage and its ability to meet
long-term obligations.

Debt to Equity Ratio: Total Debt / Shareholders' Equity


Compares the company's total debt to its equity, indicating the degree of financial
leverage.

Interest Coverage Ratio: EBIT / Interest Expense

Measures the company's ability to meet its interest obligations from its operating
income.

4. E9iciency Ratios

These ratios indicate how well a company utilizes its assets and manages its
operations.

Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory

Shows how many times the company’s inventory is sold and replaced over a period.

Receivables Turnover Ratio: Net Credit Sales / Average Accounts Receivable

Measures how e9iciently a company collects revenue from its credit sales.

Asset Turnover Ratio: Net Sales / Average Total Assets

Indicates how e9ectively the company uses its assets to generate sales.

5. Market Ratios

These ratios provide insights into the company's market performance and investor
perceptions.

Earnings Per Share (EPS): Net Income / Number of Outstanding Shares

Indicates the amount of profit attributed to each share of stock.

Price to Earnings Ratio (P/E Ratio): Market Price per Share / Earnings per Share

Shows the relationship between the company's stock price and its earnings per share.

Dividend Yield: Annual Dividends per Share / Market Price per Share

Measures the dividend income relative to the market price of the stock.

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