Important accounting ratios and formulas

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

Below are the important accounting ratios and formulas:

Test of liquidity

Ratios to be computed:

1. Current ratio
Formula:
= Current Assets / Current liabilities
2. Quick or acid test or liquid ratio (for immediate solvency)
Formula
= (Liquid/Quick Assets) / Current liabilities
3. Absolute Liquid ratio
Formula
= Absolute liquid assets / Current liabilities

Current Assets Movement or Activity Ratios

Ratios to be computed:

1. Inventory Stock Turn Over Ratio
Formula
= Cost of goods sold / Average inventory at cost
2. Debtors or receivable turnover ratio/velocity
Formula
= Net credit annual sales / Average trade debtors
3. Average Collection period
Formula
= Total trade debtors / sales per day
4. Creditors/Payable/Turnover ratio/velocity
Formula
= Net credit annual purchase / 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

Analysis of long term financial position or test of solvency

Ratios to be computed:

1. Debt Equity ratio
Formula
= Outsider’s fund / Shareholder’s fund
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 shareholder’s fund (Debt-Equity)
Formula
= Long term debt / Shareholder’s fund
4. Proprietary or Equity Ratio
Formula
= Shareholder’s fund / Total assets
5. Solvency Ratio
Formula
= Total liabilities to outsiders / Total Assets
6. Fixed Assets Net Worth Ratio
Formula
= Fixed assets after depreciation / Shareholder’s fund
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 / shareholder’s fund
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 / FixedAssets

Analysis of profitability

(a). General Profitability

Ratio to be computed:

1. Gross profit ratio
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
4. Net Profit Ratio
Formula
= (Net profit after tax x 100) / Net sales

(b). Overall Profitability

Ratios to be computed:

1. Return on shareholder’s investment or Networth
Formula
= Net Profit (after interest & tax) / shareholder’s Fund
2. Return on equity capital
Formula
= Net Profit after tax / Average shareholder’s equity
3. Earning 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 / Employed Capital
6. Dividend Yield Ratio
Formula
= Dividend per equity share / Market value per share
7. Dividend Payout Ratio or Payout ratio
Formula
= Dividends / Net Income
8. Price Earning Ratio
Formula
= Market Price per share / Earning per share

Analysis of capital structure or leverage

Ratios to be computed:

1. Capital Gearing Ratio
Formula
= Common stockholders’ equity / Fixed cost bearing fund
2. Total investment to long term liabilities
Formula
= Shareholders’ fund + Long term liabilities / Long term liabilities
3. Debt 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 proprietors’ fund
Formula
= Outsider’s fund / Shareholders’ fund
6. Ratio of reserves to equity capital
Formula
= (Reserves x 100) / Equity Share Capital
7. Financial leverage
Formula
= EBIT / (EBIT – interest & preference dividend)
8. Operating Leverage
Formula
= Contribution / EBIT

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