Important Accounting Ratios and Formulas

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 1, 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 / Fixed Assets

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 Net worth
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

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, 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, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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