# Financial Accounting Ratios & Formulas

# Financial Accounting Ratios and Formulas:

This is a collection of financial ratio formulas which can help you calculate financial ratios in a given problem.

# Analysis of Profitability:

### General profitability:

- Gross profit ratio = (Gross profit / Net sales) × 100
- Operating ratio = (Operating cost / Net sales) × 100
- Expense ratio = (Particular expense / Net sales) × 100
- Operating profit ratio = (Operating profit / Net sales) × 100

### Overall profitability:

- Return on shareholders’ investment or net worth = Net profit after interest and tax / Shareholders’ funds
- Return on equity capital = (Net profit after tax – Preference dividend) / Paid up equity capital
- Earnings per share (EPS) ratio = (Net profit after tax – Preference dividend) / Number of equity shares
- Return on gross capital employed = (Adjusted net profit / Gross capital employed) × 100
- Return on net capital employed = (Adjusted net profit / Net capital employed) × 100
- Dividend yield ratio = Dividend per share / Market value per share
- Dividend payout ratio or pay-out ratio = Dividend per equity share / Earnings per share

## Short Term Financial Position or Test of Solvency:

- Current ratio = Current assets / Current liabilities
- Quick or acid test of liquid ratio (for immediate solvency) = Liquid assets / Current liabilities
- Absolute liquid ratio = Absolute liquid assets / Current liabilities

## Current Assets Movement, Efficiency or Activity Ratios:

- Inventory / Stock turnover ratio = Cost of goods sold / Average inventory at cost
- Debtors of receivables turnover ratios = Net credit sales / Average trade debtors
- Average collection period = (Trade debtors No. of working days) / Net credit sales
- Creditors or payables turnover ratio = Net credit purchase / Average trade creditors
- Average payment period = (Trade creditors No. of working days) / Net credit purchase
- Working capital turnover ratio = Cost of sales / Net working capital

## Analysis of Long Term Solvency:

- Debt to equity ratio = Outsiders funds / Shareholders funds or External funds / Internal funds
- Ratio of long term debt to shareholders funds (Debt equity) = Long term debt / Shareholders funds
- Proprietary of equity ratio = Shareholders funds / Total assets
- Fixed assets to net worth = Fixed assets after depreciation / Shareholders’ funds
- Fixed assets ratio or fixed assets to long term funds = Fixed assets after depreciation / Total long term funds
- Ratio of current assets proprietors’ funds = Current assets / Shareholders’ funds
- Debt service or interest coverage ratio = Net profit before interest and tax / Fixed interest charges
- Capital gearing ratio = Equity share capital / Fixed interest bearing funds

### You may also be interested in other articles from “financial statement analysis” chapter:

- Horizontal and Vertical Analysis
- Ratios Analysis
- Horizontal Analysis or Trend Analysis
- Trend Percentage
- Vertical Analysis
- Accounting Ratios Definition, Advantages, Classification and Limitations:
- Gross profit ratio
- Net profit ratio
- Operating ratio
- Expense ratio
- Return on shareholders investment or net worth
- Return on equity capital
- Return on capital employed (ROCE) Ratio
- Dividend yield ratio
- Dividend payout ratio
- Earnings Per Share (EPS) Ratio
- Price earning ratio
- Current ratio
- Liquid/Acid test/Quick ratio
- Inventory/Stock turnover ratio
- Debtors/Receivables turnover ratio
- Average collection period
- Creditors/Payable turnover ratio
- Working capital turnover ratio
- Fixed assets turnover ratio
- Over and under trading
- Debt-to-equity ratio
- Proprietary or Equity ratio
- Ratio of fixed assets to shareholders funds
- Ratio of current assets to shareholders funds
- Interest coverage ratio
- Capital gearing ratio
- Over and under capitalization
- Financial-Accounting- Ratios Formulas
- Limitations of Financial Statement Analysis

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