# Important Accounting Ratios and Formulas

### Reviewed by Subject Matter Experts

Updated on March 26, 2023

## 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:

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