JA Jimenez & Associates, Inc.
 JA Jimenez & Associates, Inc. 

Accounting Ratios & Formulas

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.


Short Term Solvency or Liquidity 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


Long Term Solvency or Financial Leverage Ratios


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



Asset use or turnover ratios


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



Profitability Ratios


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)



Market Value Ratios


Price to Earnings ratio = Price per share / Earnings per share


Market-to-book ratio = Market value per share / book value per share




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