Summary: Accounting Ratios - B Com PDF Download

Overview of Accounting Ratios

Accounting ratios are vital tools used in financial analysis to evaluate a company's performance and financial health. They serve to compare financial statement items and provide insights into operational efficiency, profitability, liquidity, and solvency. Understanding these ratios is essential for stakeholders, including investors, creditors, and management, to make informed decisions.

Types of Accounting Ratios

• Liquidity Ratios: Measure a company's ability to meet short-term obligations. Key ratios include:
  • Current Ratio = Current Assets / Current Liabilities
  • Quick Ratio = (Current Assets - Inventories) / Current Liabilities
• Profitability Ratios: Assess a company's ability to generate profit relative to sales, assets, or equity. Important ratios include:
  • Gross Profit Margin = (Gross Profit / Revenue) x 100
  • Net Profit Margin = (Net Income / Revenue) x 100
  • Return on Assets (ROA) = Net Income / Total Assets
  • Return on Equity (ROE) = Net Income / Shareholder's Equity
• Solvency Ratios: Indicate a company's ability to meet long-term debts. Examples include:
  • Debt to Equity Ratio = Total Liabilities / Shareholder's Equity
  • Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense

Importance of Accounting Ratios

Accounting ratios play a crucial role in financial analysis by enabling comparisons across time periods and with industry benchmarks. They help highlight trends, strengths, and weaknesses within a company's financial operations, facilitating strategic decision-making for future growth and sustainability.