Accounting ratios

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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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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Net profit ratio

What is Net Profit 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 of Net Profit Ratio Both the components of the formula (i.e., net profit and net sales) are usually available from trading and profit and loss account or …

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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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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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