# Important accounting ratios and formulas

*in*Ratio Analysis

Below are the important accounting ratios and formulas:

## Test of liquidity

**Ratios to be computed:**

**1. Current ratio**

**Formula:**

= Current Assets / Current liabilities

**2. Quick or acid test or liquid ratio (for immediate solvency)**

**Formula**

= (Liquid/Quick Assets) / Current liabilities

**3. Absolute Liquid ratio**

**Formula**

= Absolute liquid assets / Current liabilities

## Current Assets Movement or Activity Ratios

**Ratios to be computed:**

**1. Inventory Stock Turn Over Ratio**

**Formula**

= Cost of goods sold / Average inventory at cost

**2. Debtors or receivable turnover ratio/velocity**

**Formula**

= Net credit annual sales / Average trade debtors

**3. Average Collection period**

**Formula**

= Total trade debtors / sales per day

**4. Creditors/Payable/Turnover ratio/velocity**

**Formula**

= Net credit annual purchase / 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 be computed:

**1. Debt Equity ratio**

**Formula**

= Outsider’s fund / Shareholder’s fund

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 shareholder’s fund (Debt-Equity)**

**Formula**

= Long term debt / Shareholder’s fund

**4. Proprietary or Equity Ratio**

**Formula**

= Shareholder’s fund / Total assets

**5. Solvency Ratio**

**Formula**

= Total liabilities to outsiders / Total Assets

**6. Fixed Assets Net Worth Ratio**

**Formula**

= Fixed assets after depreciation / Shareholder’s fund

**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 / shareholder’s fund

**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 / FixedAssets

## Analysis of profitability

### (a). General Profitability

#### Ratio to be computed:

**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

**Formula**

= (Net profit after tax x 100) / Net sales

### (b). Overall Profitability

#### Ratios to be computed:

**1. Return on shareholder’s investment or Networth**

**Formula**

= Net Profit (after interest & tax) / shareholder’s Fund

**2. Return on equity capital**

**Formula**

= Net Profit after tax / Average shareholder’s equity

**3. Earning 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 / Employed Capital

**Formula**

= Dividend per equity share / Market value per share

**7. Dividend Payout Ratio or Payout ratio**

**Formula**

= Dividends / Net Income

**8. Price Earning Ratio**

**Formula**

= Market Price per share / Earning per share

## Analysis of capital structure or leverage

### Ratios to be computed:

**Formula**

= Common stockholders’ equity / Fixed cost bearing fund

**2. Total investment to long term liabilities**

**Formula**

= Shareholders’ fund + Long term liabilities / Long term liabilities

**3. Debt 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 proprietors’ fund**

**Formula**

= Outsider’s fund / Shareholders’ fund

**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