Current Cash Debt Coverage Ratio

What is current cash debt coverage ratio? – Definition: Current cash debt coverage ratio is a liquidity ratio that is used to measure how efficient the entity is with its cash management. It shows the company’s relation to the operating cash flow received during an accounting period with the current liabilities it needs to clear. …

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Defensive Interval Ratio (DIR)

What is Defensive Interval Ratio (DIR)? Defensive interval ratio used to measure the cash-based liquidity and determines the number of days a Company/Organization can operate without using non-current assets or other cash financial resources. The defensive interval is also known as the defensive interval period (DIP) or basic defense interval (BDI). Defensive Interval Ratio is …

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Limitations of accounting ratios

Accounting ratios are a very powerful tool for analysis and planning. However, they are not without their limitations. Two principal limitations of accounting ratios are given below: (a) An accounting ratio is only an indicator of a problem; it is not a solution to a problem. For example, a poor gross profit ratio shows that …

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Uses and advantages of accounting ratios

Accounting ratios are a very powerful tool for evaluating the performance of a business unit. The most important uses and advantages of accounting ratios are given below: (1). Basis for comparison of two or more entities The principal advantage of ratios is that they provide a basis for comparison. It is impossible to compare two …

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Average stock retention period ratio

Average stock retention period ratio provides another way of looking at average stock and rate of stock turn. This is calculated to show the period, in weeks or months, for which stock remains with a business before it is sold off. Obviously, if the rate of stock turn is high, average stock retention period must …

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Average period of credit received

Average period of credit received ratio is calculated in weeks, or months, to ascertain how long does the company take to pay off its trade creditors. It is a fallacy to assume that a company that is successful in having a long credit received period is efficient. Like every thing else in the world, credit has a …

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Average credit allowed period

This is another way of stating the debtors turnover ratio. It is calculated in number of weeks (or months) taken by each debtor, on average, to pay his debt to the company. Obviously, if the rate of debtors turnover is high, average credit allowed period would be low. Conversely, if the rate of debtors turnover …

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Accounts receivable turnover ratio

Accounts receivable turnover ratio ( also known as debtors turnover ratio) shows the effectiveness of the company’s credit control system. Much like inventory turnover ratio, accounts receivable turnover ratio shows how many times in a year debtors are given credit and they fully repay it. It is calculated as follows: Formula of Accounts receivable turnover …

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Quick ratio or acid test ratio

Quick ratio Definition Quick ratio or acid test ratio is the ratio of quick assets to all current liabilities. Quick assets for this purpose include cash, marketable securities and good debtors only. In other words, prepaid expenses and inventories are not included in quick assets because there may be a doubt in quick liquidity of inventory. …

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Current ratio

What is Current Ratio? – Definition Current ratio or working capital ratio is a ratio of current assets to current liabilities of a business. In other words, it is defined as the total current assets divided by the total current liabilities.  The Current Ratio is one of the oldest ratios used in liquidity analysis. It …

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Interest Coverage Ratio (ICR)

What is Interest Coverage Ratio (ICR)? – Definition The interest coverage ratio is aimed at indicating how well can a company service its long term loans. ICR is calculated by dividing net profit (before deducting the interest) by the total interest expenses and is expressed in times. The interest coverage ratio is also known as …

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Capital gearing ratio

Capital gearing ratio is the ratio of capital with fixed return (i.e. preference share capital plus long term liabilities) to capital with variable return (i.e. ordinary share capital). The total capital employed of a company comprises of three main segments: equity, preference share capital and long term loans. Equity holders (i.e. ordinary shareholders) are paid …

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Accounting ratios and their classification

What is the financial/accounting ratio? A ratio is a relationship between two quantities by dividing one quantity by another. Financial/accounting ratios help the analyst in making meaningful comparisons of a firm’s financial data at different points of time and with other firms. An accounting ratio is simply one accounting figure expressed in terms of another. …

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Gross profit ratio

Gross Profit Ratio – Definition Gross profit ratio (or gross profit margin) shows the gross profit as a percentage of net sales. The ratio provides a pointer of the company’s pricing policy. Certain businesses aim at a faster turnover through lower prices. Such businesses would have a lower gross profit percentage but a larger volume of …

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Average stock

Average stock or average inventory is equal to stock at the beginning of the period plus stock at the ending of the period divided by two. It represents the investment a business has made in inventory. Formula Average stock is arrived at using the following formula: It can be calculated for each class of stock, namely raw materials, work in progress …

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Assets turnover ratio

What is Assets turn over ratio? Assets turnover ratio shows the relationship between the value of total assets held by a company to the value of its annual sales (turnover). Total assets turnover ratio may appear to be unnatural ratio, yet it is helpful in assessing how well the assets of the business are being used. After all, …

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Operating assets turnover ratio

Operating assets turnover ratio (also known as current assets turnover ratio) is an improvement on the total assets turnover ratio. It shows the number of times operating assets are turnover in the year. Operating assets for this purpose are the current assets. Operating or current assets are closely linked to volume of business. Stocks levels …

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Return on equity (ROE) ratio

What is Return on Equity (ROE)? -Definition The return on equity ratio (ROE ratio) is calculated by expressing net profit attributable to ordinary shareholders as a percentage of the company’s equity. Equity of a company comprises of paid-up ordinary share capital, reserves and unappropriated profit. This represents the total interest of ordinary shareholders in the …

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Return on capital employed (ROCE) ratio

Definition of Return on Capital Employed Return on capital employed (ROCE) ratio is calculated by expressing profit before interest and tax as a percentage of total capital employed. This ratio aims at showing how well a company has used its total long term funds. A high return on the capital employed ratio is the indication …

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Need of comparing financial performance

At the end of each financial year every company produces a trading and profit and loss account (or income statement), an appropriation account (or statement of retained earnings) and a balance sheet. Essentially these statements present, in a summarized form, all the information recorded in the company’s accounting books. Results disclosed by these statements are …

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Net profit ratio

What is Net Profit (NP) Ratio? Net profit ratio (also known as net profit margin) is the calculation of net profit after tax as a percentage of net sales. Formula The Formula to calculate NP ratio is as: Both the components of the formula (i.e., net profit and net sales) are usually available from trading and …

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Earnings per share (EPS) ratio

Earnings per share ratio is effectively a restatement of return on equity (ROE) ratio. While return on equity ratio is calculated as a percentage, taking total net profit and total equity, earnings per share ratio shows how much profit has been earned by each ordinary share (common share) in the year. Formula Net profit attributable …

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Price earnings ratio

Price earnings ratio (also known as price to earnings ratio or P/E ratio) is the ratio of market value of the company’s ordinary (common) share to earnings per share.  It shows the number of times the market price of a company’s share is higher than its earnings per share for the last twelve months. It is therefore also termed as …

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Earnings yield ratio

Earnings yield ratio is an effective restatement of price earnings ratio. It shows earnings per share as a percentage of the market value of the ordinary share. It is arrived at by dividing the earnings per share (EPS) for the last 12 months by the current market value of the share and multiplying the result by 100. …

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Dividend payout ratio

Dividend payout ratio shows what portion of available profits is distributed away as dividend. Hence, it also indicates what portion is being reinvested in the business. The dividend payout ratio tells us what percentage of the firm’s earnings are being paid to Equity Shareholders in the form of dividends. Formula Dividend payout ratio is the ratio …

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Dividend coverage ratio

Dividend coverage ratio shows the number of times the dividend is covered by available profit and is calculated separately for each class of shares. Formula For preference shares: and for ordinary (common) shares: Example Profit before tax: $480,000 Corporation tax rate: 50% Dividend to preference shareholders: $15,000 Dividend to ordinary shareholders: $25,000 Calculate dividend coverage …

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Dividend yield ratio

Dividend yield ratio shows the percentage return to the investor on the market value of the preference or ordinary share he owns. Like dividend coverage ratio, this ratio is also calculated separately for each class of shares. Formula For preference shares: and for ordinary shares: Dividend is very often a major part of all that …

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Accounting equation – Q & A

Test your learning about ‘accounting equation’ chapter by answering 10 short questions given below. We suggest you try to answer each question yourself before clicking on the ‘see answer’ button. If you find difficulty in answering these questions, read ‘accounting equation‘ chapter thoroughly from explanation section of the website.

Accounting equation – MCQs

Take a quick Multiple Choice Questions (MCQs) test about Accounting Equation. These MCQs can help you to prepare for your exams, interviews, and different tests. Just click the “start quiz” button and start the accounting equation MCQs quiz. If you find difficulty in answering these questions, read the ‘Accounting Equation‘ chapter thoroughly from the explanation …

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