Top Accounting Ratios that Every Accountant Should Know

The accounting ratios or financial ratios can be used to evaluate the financial condition of a company. 

The accounting ratios may be used by the Bankers, by the current and potential shareholders (Owners) and also by Creditors of the Company. 

Therefore, it's very much essential for the Accountants to know about the accounting ratios and the interested parties of the Ratios. The following is the list of important list of Accounting Ratios that Every Accountant should know:

To Test	Name of Ratio	Formula	Parties Interested	Industry Norm
Liquidity and Solvency	i) Current Ratio	Current Assets Current Liabilities	Short-term creditors, investors, money lenders & like parties	2:1
	ii)  Liquid/Quick/ Acid Test Ratio	Current assets - Stock - Prepaid ExpensesCurrent Liabilities - Bank Overdraft - Prereceived Income	-do-	1:1
	iii)  Absolute Liquid Ratio	(Cash + Marketable securities) Quick Liabilities	-do-	1:1
	iv)  Proprietary Ratio	Proprietor’s Fund Total Assets  [Proprietor’s funds = Equity Capital + Preference Capital + Reserves and Surplus + Accumulated funds - Debit balances of P & L A/c and Miscellaneous Expenses]	-do-	60% to 75%
Capitalisation	i)  Debt Equity Ratio	Debt Equity  [Debt = Long/Short-term loans, debentures, bills, etc, Equity = Proprietor’s funds]	-do-	2:1
	ii)  Capital Gearing Ratio	Fixed cost funds Funds not carrying fixed cost  [Fixed cost funds = Preference share capital, Debentures, Loans from  banks, financial institutions, other unsecured loans]. [Funds not carrying fixed cost = Equity share capital + undistributed profit - P & L A/c (Dr. Bal.) - Misc. expenses].	-do-	2:1
Profitability and management efficiency	i)  Gross Profit Ratio	Gross Profit x 100 Net sales	Shareholders, Long-term Creditors, Government	20% to 30%
	ii) Net Profit Ratio	Net Profit x 100 Net sales [Net profit may be either Operating Net profit, Profit before tax or Profit after tax].	-do-	5% to 10%
	iii)  Return on Capital Employed (ROCE)	Net profit x 100 Capital employed  [Capital employed = Fixed Assets + Current Assets - Current Liabilities].	-do-	-
	iv)  Return on Proprietors fund	Profit after tax Proprietor’s funds	-do-	-
	v)  Return on Capital	Profit after tax less pref. Dividend  x 100 Equity Share Capital	-do-	-
	vi)  Earnings per share [EPS]	Profit after tax less pref. Dividend Total  No. of Equity Shares	-do-	-
	vii)  Dividend per share [DPS]	Total Dividend paid to ordinary shareholders Number of ordinary shares	Shareholders, Investors	-
Management efficiency	i)  Stock Turnover	Cost of goods sold Average Stock	Management	5 to 6 times
	ii)  Debtors Turnover Ratio	Debtors + Bills receivable  x 365 Net Credit sales	Management	45 to 60 days
	iii)  Debtor’s Turnover Rate	Credit sales Avg. Debtors + Bills receivable	Management	60 to 90 days
	iv)  Creditor’s Turnover Ratio	Creditors + Bills payable x 365 Credit purchases	-do-	-
	v)  Creditor’s Turnover Rate	Credit purchases Average Creditors	-	-
	vi)  Operating Ratio	Operating Costs x 100 Net sales  [Operating Cost = Cost of goods sold + Operating expenses (viz. Administrative, selling & finance expenses)]	-	-
Number of times preference dividends covered by net profit	Preference shareholders’ coverage ratio	Net profit (after Interest & Tax but before equity dividend) Preference Dividend	Preference shareholders	-
Number of times equity dividends covered by net profit	Equity shareholder’s coverage ratio	Net profit (after interest, tax & Pref. Dividend) Equity Dividend	Equity shareholders	-
Number of times fixed interest covered by net profit	Interest coverage  ratio	Net profit (before Interest & Tax) (PBIT) Fixed interests & charges	Debenture holders, Loan creditors	-
Relationship between net profit and total fixed charges	Total coverage ratio	Net profit (before Interest & Tax) (PBIT) Total fixed charges	Shareholders, investors, creditors, lenders	-
The idle capacity in the Organisation	Fixed expenses to total cost ratio	Fixed expenses Total cost	Management shareholders	-
Material consumption to sales	Material consumption to sales ratio	Material consumption Sales	Management	-
Wages to sales	Wages to sales ratio	Wages Sales	Management	-
The future market price of a share	Price earning ratio	Market price of a share (MPS) Earnings per share (EPS)