Accounting Ratios
Ratio: Ratio is mathematical relationship between two related items or group of items expressed in
quantitative forms. Two numbers are needed to calculate the ratio. One number is put as the numerator
and the other as the denominator.
Accounting Ratio: When ratio are calculated on the basis of accounting information is known as
accounting ratio this is also known as financial ratio.
Ration Analysis: Ratio analysis is a study of relationship among the various financial factors in a business
to judge the profitability, efficiency and financial soundness of the business and to locate the symptoms
of weakness and strength.
Accounting Ratios
Income Statement Ratio Balance Sheet Ratio Composite Ratio
Income Statement Ratio Balance Sheet Ratio Composite Ratio
In these types of Ratios both the In these types of Ratios both the In these type of ratios one
variables are from the Income variables are from the Balance variable is from the B.S. and
Statement. For ex. G.P. Ratio . Sheet. For ex. Debt Equity Ratio. other is from the Income
Statement. For ex. Debtors
Turnover Ratio.
Accounting Ratios
Liquidity Ratio Solvency Ratio Activity Ratio Profitability Ratio
Current Ratio Debt Equity Ratio STR G. Profit Ratio
Liquid Ratio Proprietary Ratio DTR N. Profit Ratio
Total Assets to Debt Ratio F.A.TR ROI
W.C.TR ROE
CTR EPS
DPS
P/E Ratio
Uses of Accounting Ratio:
1. Useful in analysis of financial statements.
2. Useful in intra-firm and inter-firm comparison.
3. Judging the profitability of the business.
4. Judging the operational efficiency of the business.
5. Judging the short term and long term solvency of the business.
6. Useful in locating weak spots of the business.
Liquidity Ratio Solvency Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝐷𝑒𝑏𝑡 (𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐿𝑜𝑎𝑛𝑠 )
Current Ratio = Debt Equity Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑆𝑎𝑟𝑒 𝐻𝑜𝑙𝑑𝑒𝑟𝑠 𝐹𝑢𝑛𝑑 )
𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 𝑃𝑟𝑜𝑝𝑟𝑖𝑒𝑡𝑜𝑟𝑠 𝑓𝑢𝑛𝑑 ⁄𝑆𝑎𝑟𝑒 𝑜𝑙𝑑𝑒𝑟 𝐹𝑢𝑛𝑑
Acid-Test Ratio= Proprietary Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Total Assets Debt Ratio =
𝐷𝑒𝑏𝑡
Activity Ratio Profitability Ratio
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
Stock Turnover Ratio= Gross Profit Ratio= ×100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
Debtor’s Turnover Ratio = Net Profit Ratio= ×100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
Operating Ratio= ×100
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Fixed Assets Turnover Ratio =
𝑁𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
Return on
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥
Working Capital Turnover Ratio =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Investment= ×100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐 𝑎𝑠𝑒 Return on Equity=
Creditor’s Turnover Ratio = 𝐸𝑞𝑢𝑖𝑡𝑦
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Earnings
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 ,𝑇𝑎𝑥 𝑎𝑛𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Per Share =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆𝑎𝑟𝑒𝑠
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑡𝑜 𝐸𝑞 .𝑆𝑎𝑟𝑒𝑠
Dividend Per Share=
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆𝑎𝑟𝑒𝑠
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑆𝑎𝑟𝑒
Price Earnings Ratio=
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑃𝑒𝑟 𝑆𝑎𝑟𝑒𝑠
1. Current Assets = Cash + Bank + Stock + Prepaid Expenses + Debtors + Bill Receivable +
Short Term Investment (Investment in preference share maturity period within 3
months) + Accrued Income
2. Current Liabilities = Creditor + Bills Payable + Outstanding Expenses + Income Received
in Advance + Bank Overdraft + Short Term Loan
3. Working Capital = Current Assets-Current Liabilities
4. Quick Assets = Current Assets – Current Liabilities
5. Debt = Long Term Debt i.e. Debenture, Long Term Loan and Public Deposit
6. Equity = Equity Share Holder Fund + Preference Share Holders Fund
7. Total Assets = Fixed Assets + Investment + Current Assets, Loans and Advances
Important Note:
(1) Fixed Assets is calculated after charging Depreciation.
(2) Total Assets do not include Miscellaneous Expenditure.
8. Cost of Goods Sold = Opening Stock + Net Purchase + Direct Expenses – Closing Stock
Or
= Net Sales – Gross Profit
9. Gross Profit = Net Sales – Cost of Goods Sold
10. Net Sales = Total Sales – Sales Return
11. Net Purchase = Total Purchase – Purchase Return
12. Net Credit Sales = Net Credit Sales – Sales Return
13. Net Credit Purchase = Net Credit Purchase – Purchase Return
14. Average Stock = Opening Stock + Closing Stock
2
15. Average Receivable = Ope. Bal. of Debtor and B. R. + Clo. Bal. of Debtor and B. R.
2
16. Average Payable = Ope. Bal. of Creditor and B. P. + Clo. Bal. of Creditor and B. P.
2
17. Operating Expenses = Cost of Goods Sold + Administration and Selling Expenses
