# Important accounting ratios and formulas

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

Also Check:  Q. 4. Explain Return on equity capital with examples

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:

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 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

Also Check:  Q. 2. Explain balance sheet ratios with examples

6. Dividend Yield Ratio

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:

1. Capital Gearing Ratio

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

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