Accounting Ratios - English

Accounting Ratios

Accounting ratios, also known as financial ratios, are metrics used to evaluate a company's financial performance, efficiency, liquidity, solvency, and other aspects of its operations. They provide insights into various aspects of a company's financial health and help stakeholders make informed decisions. Here are some common types of accounting ratios:

Liquidity Ratios:

Current Ratio: Current assets divided by current liabilities. It measures a company's ability to cover short-term liabilities with short-term assets.

Quick Ratio (Acid-Test Ratio): (Current assets - Inventory) divided by current liabilities. It assesses the company's ability to meet short-term obligations without relying on the sale of inventory.

Profitability Ratios:

Gross Profit Margin: (Gross profit / Revenue) * 100. It measures the percentage of revenue that exceeds the cost of goods sold.

Net Profit Margin: (Net profit / Revenue) * 100. It indicates the percentage of each dollar of revenue that results in net profit after all expenses are deducted.

Efficiency Ratios:

Inventory Turnover Ratio: Cost of goods sold / Average inventory. It measures how many times a company's inventory is sold and replaced over a period.

Accounts Receivable Turnover Ratio: Net credit sales / Average accounts receivable. It indicates how quickly a company collects its accounts receivable.

Solvency Ratios:

Debt-to-Equity Ratio: Total debt / Total equity. It measures the proportion of debt and equity used to finance a company's assets.

Interest Coverage Ratio: Earnings before interest and taxes (EBIT) / Interest expense. It evaluates a company's ability to pay interest on its outstanding debt.

Market Value Ratios:

Price-to-Earnings (P/E) Ratio: Market price per share / Earnings per share (EPS). It compares a company's current share price to its earnings per share.

Price-to-Book (P/B) Ratio: Market price per share / Book value per share. It compares a company's market value to its book value.

These ratios are essential tools for investors, creditors, and management to assess and compare the financial performance and health of a company over time or against its peers.