This article provides an overview of important accounting ratios and formulas. Formula: = Current assets / Current liabilities 2. Quick ratio (or acid test ratio or liquid ratio) (for immediate solvency) Formula: = (Liquid assets/Quick assets) / Current liabilities Formula: = Absolute liquid assets / Current liabilities 1. Inventory stock turnover ratio Formula: = Cost of goods sold / Average inventory at cost 2. Debtors or receivables turnover ratio/velocity Formula: = Net annual credit sales / Average trade debtors 3. Average collection period Formula: = Total trade debtors / sales per day 4. Creditors/payable/turnover ratio/velocity Formula: = Net annual credit purchases / Average trade creditors 5. Average payment period Formula: = Total trade creditors / Average daily purchase 6. Working capital turnover ratio Formula: = Cost of sale / Net working capital 1. Debt-to-equity ratio Formula: = Outsiders' funds / Shareholders' funds Or = External equities / Internal equities 2. Funded debt to total capitalization ratio Formula: = (Funded debt x 100) / Total capitalization 3. Ratio of long-term debt to shareholders' funds (Debt-Equity) Formula: = Long-term debt / Shareholders' funds 4. Proprietary or equity ratio Formula: = Shareholders' funds / Total assets 5. Solvency ratio Formula: = Total liabilities to outsiders / Total assets 6. Fixed assets net worth ratio Formula: = Fixed assets after depreciation / Shareholders' funds 7. Fixed assets ratio or fixed assets to long-term funds Formula: = Fixed assets after depreciation / Total long-term funds 8. Ratio of current assets to proprietor's fund Formula: = Current assets / Shareholders' funds 9. Debt service or interest coverage ratio Formula: = Net profit before tax/interest / Fixed interest charges 10. Total coverage or fixed charge coverage Formula: = FBIT / Fixed Assets Ratios to Calculate Formula: = (Gross profit x 100) / Net sales 2. Operating ratio Formula: = (Operating cost x 100) / Net sales 3. Expense ratio Formula: = (Particular expense x 100) / Net sales Formula: = (Net profit after tax x 100) / Net sales 1. Return on shareholders' investment or net worth Formula: = Net profit (after interest & tax) / Shareholders' funds 2. Return on equity capital Formula: = Net profit after tax / Average shareholders' equity 3. Earnings per share Formula: = Total earnings / outstanding shares 4. Return on gross capital employed Formula: = (Adjusted net profit x 100) / Net capital employed 5. Return on net capital employed Formula: = Net operating profit / Net capital employed Formula: = Dividend per equity share / Market value per share 7. Dividend payout ratio or payout ratio Formula: = Dividends / Net Income 8. Price-to-earnings ratio Formula: = Market price per share / Earning per share Formula: = Common stockholders' equity / Fixed cost bearing fund 2. Total investment to long-term liabilities Formula: = Shareholders' funds + Long-term liabilities / Long-term liabilities 3. Debt-to-equity ratio Formula: = Total liabilities / Total equity 4. Ratio of fixed assets to funded debts Formula: = Fixed assets / Funded debt 5. Ratio of current liabilities to proprietor's funds Formula: = Outsiders' funds / Shareholders' funds 6. Ratio of reserves to equity capital Formula: = (Reserves x 100) / Equity share capital Formula: = EBIT / (EBIT - Interest & Preference dividend) Formula: = Contribution / EBITTest of Liquidity
Ratios to Calculate
Current Assets Movement or Activity Ratios
Ratios to Calculate
Analysis of Long-Term Financial Position or Test of Solvency
Ratios to Calculate
Analysis of Profitability
A. General Profitability
B. Overall Profitability
Ratios to Calculate
Analysis of Capital Structure or Leverage
Ratios to Calculate
Important Accounting Ratios and Formulas FAQs
The main types of accounting ratios are:- Liquidity ratios- Efficiency or activity ratios- Financial leverage ratios- Profitability ratios
The liquidity ratio is used to measure a company’s ability to pay its short-term obligations. The most common liquidity ratios are the current ratio and the quick ratio.
The working capital turnover ratio is calculated by dividing the cost of sales by the net working capital.
The debt service coverage ratio is a measure of a company’s ability to meet its fixed debt payments. The formula for calculating the debt service coverage ratio is net income before interest and tax divided by fixed interest charges.
The price-to-earnings (P/E) ratio is a measure of how much investors are willing to pay for each dollar of a company’s earnings. The P/E ratio is calculated by dividing the market price of a share by the earnings per share.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
