Accounting ratios, sometimes referred to as financial ratios, are the various finance and accounting measures used to evaluate business efficiency and profitability based on financial reporting; balance sheet, income statement, and statement of retained earnings. The following tables are segmented based on the specific area of analysis. Most of the ratios below are discussed in further detail with calculator, explanation, and sample problems.
This first table provides ratios that measure a businesses ability to pay current liabilities.
The ratios in the table below are used to measure how well a business sells inventory and their ability to collect receivables.
Accounting measures to evaluate a business' ability to pay long-term debt.
Accounting measures to evaluate how a business is doing financially with respect to their profits.
Evaluate stocks to determine if they are good investments.
The following table represents finance calculations to measure investments (i.e. project alternatives).
Liability Ratios
This first table provides ratios that measure a businesses ability to pay current liabilities.
| Ratio | Formula | What the ratio tells us |
| Accounts Payable Turnover | Total supplier purchases ÷ Average Accounts Payable | How many times, on average, a company pays its accounts payable per a period |
| Acid-Test Ratio | (Cash + Short-Term Investments + Net Current Receivables) ÷ Total Current Liabilities | Business ability to pay current liabilities if they were to become due imediately |
| Average Accounts Payable | (Beginning Period Accounts Payable + Ending Period Accounts Payable) ÷ 2 | Average accounts payable for a period |
| Cash Ratio | (Cash + Cash Equivalents) ÷ Total Current Liabilities | Business ability to pay current liabilities with cash and cash equivalents |
| Current Ratio | Total Current Assets ÷ Total Current Liabilities | Business ability to pay current liabilities from current assets |
| Times Interest Earned | (Net Income + Income Tax Expense + Interest Expense) ÷ Interest Expense | How well a business will be able to pay its interest expense |
| Working Capital | Current Assets - Current Liabilities | Business ability to cover short-term financial obligations with current assets |
| Working Capital Ratio | Current Assets ÷ Current Liabilities | Business ability to pay current liabilities with current assets. |
Inventory and Receivables
The ratios in the table below are used to measure how well a business sells inventory and their ability to collect receivables.
| Ratio | Formula | What the ratio tells us |
| Accounts Receivable Collection Period | Avg Accounts Receivable ÷ (Annual Credit Sales ÷ 365) | How long it takes customers to pay their debts |
| Accounts Receivable Days | (Accounts Receivable ÷ Annual Revenue) * 365 | Number of days it takes customers to pay invoice |
| Accounts Receivable Turnover Ratio | Net Credit Sales ÷ Average Accounts Receivable | Number of times, on average, a business collects average receivables |
| Average Collection period | Days in Period ÷ Accounts Receivable Turnover | How long customers take to pay on goods purchased |
| Days' Sales in Inventory | 365 days ÷ Inventory Turnover | Average days inventory held by business |
| Days' Sales in Receivables | 365 days ÷ Accounts Receivable Turnover Ratio | Also referred to as average collection period |
| Days Sales Outstanding Ratio | (Average Accounts Receivable ÷ Total Credit Sales) * Number of Days /td> | How long it takes a company to collect payments after sales |
| Inventory Turnover | Cost of Goods Sold (COGS) ÷ Average Inventory | Average number of times business sells inventory for specified period |
| Gross Profit Percentage | Gross Profit ÷ Net Sales Revenue | Profitability of sales over cost of goods sold |
| Return on Assets | Net Income ÷ Average Total Assets | How a company uses its assets to turn a profit |
Long-Term Debt
Accounting measures to evaluate a business' ability to pay long-term debt.
| Ratio | Formula | What the ratio tells us |
| Debt Ratio | Total Liabilities ÷ Total Assets | How much assets are financed with debt, proportionately. |
| Debt to Equity Ratio | Total Liabilities ÷ Total Equity | How much equity is financed with debt, as a proportion. |
| Times Interest Earned Ratio | (Net Income + Income Tax Expense + Interest Expense) ÷ Interest Expense | Evaluate business' ability to pay interest |
Profitability Ratios
Accounting measures to evaluate how a business is doing financially with respect to their profits.
| Ratio | Formula | What the ratio tells us |
| Asset Turnover Ratio | Net Sales ÷ Average Total Assets | How well a company is using average assets to earn income |
| Cash Flow Ratio | Cash Flow from Operations ÷ Current Liabilities | How much money a business is earning from operations in comparison to current liabilities |
| Earnings per Share | (Net Income - Preferred Dividends) ÷ Weighted Avg Common Shares Outstanding | Business net income (or loss) for each outstanding share of common stock |
| Profit Margin Ratio | Net Income ÷ Net Sales | How much Net Income is produced for each dollar of net sales |
| Rate of Return on Total Assets | (Net Income + Interest Expense) ÷ Average Total Assets | How well a company is using assets to earn income |
Stock Investment (Valuation)
Evaluate stocks to determine if they are good investments.
| Ratio | Formula | What the ratio tells us |
| P/E Ratio | Common Stock Market Price ÷ Earnings per Share | Market price value per $1 of business earnings |
| Dividend Yield | Annual Dividend per Share ÷ Market Price per Share | Percent of stocks value that is issued annually as dividend |
Finance Business Investment
The following table represents finance calculations to measure investments (i.e. project alternatives).
| Ratio | Formula | What the ratio tells us |
| Payback Period Calculator | Initial Investment ÷ Periodic Cash Flow | Length of time it will take to recover the initial amount invested on an investment |
| Net Present Value | ∑ (Rt ÷ (1 + i)t) - R0 | Capital Budgeting measure to assess the value of an investment |