This article provides an overview of important accounting ratios and formulas.

## Test of Liquidity

**Ratios to Calculate**

**1. Current ratio**

**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

**3. Absolute liquid ratio**

**Formula:**

= Absolute liquid assets / Current liabilities

## Current Assets Movement or Activity Ratios

**Ratios to Calculate**

**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

## Analysis of Long-Term Financial Position or Test of Solvency

**Ratios to Calculate**

**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

## Analysis of Profitability

### A. General Profitability

**Ratios to Calculate**

**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 Calculate

**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

**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-to-earnings ratio**

**Formula:**

= Market price per share / Earning per share

## Analysis of Capital Structure or Leverage

**Ratios to Calculate**

**1. Capital gearing ratio**

**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

**7. Financial leverage**

**Formula:**

= EBIT / (EBIT – Interest & Preference dividend)

**8. Operating leverage**

**Formula:**

= Contribution / EBIT