# Important Accounting Ratios and Formulas ### Reviewed by Editorial Team

Updated on February 19, 2023

## Test of Liquidity

### Ratios to Calculate

1. Current ratio

Formula:

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:

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

## Important Accounting Ratios and Formulas FAQs ### True Tamplin, BSc, CEPF®

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

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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, or check out his speaker profile on the CFA Institute website.