Accounting ratios are among the most popular and widely used tools of financial analysis because if properly analyzed, they help us identify areas that require further analysis on financial statements of corporations. A ratio can help us uncover conditions and trends that are difficult to find by inspecting individual components making up the ratio. For instance, knowing how much cash a company has in the bank might be a little useful, but working out a ratio to determine how much cash a company has, versus how much short term debt it has coming up is a lot more useful.
A ratio is a mathematical relation between two quantities expressed as a percentage, a rate or proportion. For example a ratio can derive the answer $900 or can be expressed a 100% or 9:1 or just “9”. The major categories of accounting ratios that are known as the building blocks of financial statement analysis are i) liquidity & efficiency ratios, ii) solvency ratios, iii) asset use, iv) profitability ratios, and v)market value ratios.
Current ratio = Current assets / Current liabilities
Quick ratio = (Current assets – inventory) / Current liabilities
Cash ratio = Cash / current liabilities
Net Working Capital = Net working capital / total assets
Internal measure = Current assets / average daily operating costs
Total debt ratio = (Total assets – total equity) / Total assets
Debt to Equity ratio = Total debt / total equity
Equity Multiplier = Total assets / total equity
Long term debt ratio = Long term debt / (Long term debt + total equity)
Times interest earned = Earnings before Interest & Taxes / Interest
Cash coverage ratio = (Earnings before Interest & Taxes + Depreciation) / Interest
Inventory turnover = Cost of goods sold / Inventory
Days’ sales in Inventory = 365 days / Inventory turnover
Receivables turnover = Sales / Accounts receivable
Days’ sales in receivables = 365 days / Receivables turnover
Net Working Capital (NWC) turnover = Sales / Net Working Capital
Fixed asset turnover = Sales / net fixed assets
Total asset turnover = Sales / total assets
Profit margin = Net income / Sales
Return on Assets (ROA) = Net income / total assets
Return on Equity (ROE) = Net income / Total equity
ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Equity)
Price to Earnings ratio = Price per share / Earnings per share
Market-to-book ratio = Market value per share / book value per share