What are the Different Types of Accounting Ratios?

What are the Different Types of Accounting Ratios?

Ratios are classified into two types namely traditional classification and functional classification. The traditional classification is based on the financial statement to which the determinants belong. Based on the traditional classification, ratios are classified as:

1. Statement of Profit and Loss Ratios:

A ratio of two variables from the profit and loss statements is termed the statement of profit and loss ratio. For example, the ratio of gross profit to revenue generated from business operations is referred to as the gross profit ratio. It is calculated using both the figures derived from the profit and loss statement.

2. Balance Sheet Ratios:

If both the variables of the ratios are from the balance sheet, then it is classified as the balance sheet ratios. For example, the ratio of current assets to current liabilities is termed the current ratio. It is calculated using both the figures derived from the balance sheet.

3. Composite Ratios:

If the ratios are calculated using one variable from the financial statement and another variable from the balance sheet, then it is termed composite ratios. For example, the ratio of credit revenue from business operations to trade receivables is termed the trade receivable turnover ratio. It is calculated using one variable from the profit and loss statement (credit revenue from business operations) and another variable (trade receivables) from the balance sheet statement.

 

On the Basis of Functional Classification, Ratios Are Classified as:

1. Liquidity Ratios: To meet business commitments, the business needs liquid funds. The ability of a business to pay the due amount to stakeholders as to when it is due is known as liquidity; the ratios calculated to measure it are known as liquidity ratios. The liquidity ratios are short-term in nature. They are calculated to measure the short-term solvency of the business i.e. the firm's ability to meet its current obligations. The most common type of liquidity ratios are:

• Current Ratio

• Quick or Liquid Ratio

2. Solvency Ratio: The business solvency is determined by its ability to meet its contractual obligations towards stakeholders, specifically towards external stakeholders, and the ratios calculated to measure the business solvency positions are known as the solvency ratio. The solvency ratios are long-term in nature. The most common type of solvency ratio for calculating the business solvency are:

• Debt-Equity Ratio

• Debt to Capital Employed Ratio

• Proprietary ratio

• Total Asset to Debt Ratio

• Interest Coverage Ratio

3. Activity or Turnover Ratio:  These are the ratios that are calculated for measuring the efficiency of business operations based on the effective utilization of resources. Hence, these are also termed efficiency ratios. A higher turnover ratio means better utilization of assets and signifies improved business efficiency and profitability. The most important types of activity ratios are:

• Activity Turnover Ratio

• Trade Receivable Turnover Ratio

• Trade Payable Turnover Ratio

• Net Asset or Capital Employed Turnover Ratio

• Fixed Asset Turnover Ratio, and

• Working Capital Turnover Ratio

4. Profitability Ratios: Profitability ratios are referred to as analysis of business profits in relation to the revenue generated from the business operations ( or funds) or assets used in the business and the ratios calculated to meet its objectives are termed as profitability ratios. The most common types of profitability ratios that are used to analyze the profitability of the business are:

• Gross Profit Ratio

• Operating Ratio

• Operating Profit Ratio

• Net Profit Ratio

• Return on Investment (ROI) or Return on Capital Employed (ROCE) 

• Return on Net Worth (RONW)

• Earnings Per Share

• Book Value Per Share 

• Dividend Payout Ratio 

• Price Earning Ratio

Accounting Ratio Formulas

Here, we will list the formulas of all the accounting ratios on the basic functional classification discussed above:

Liquidity Ratio Formulas
Current Ratio	Current AssetCurrent Liabilities$$\frac{\text{Current Asset}}{\text{Current Liabilities}}$$
Quick Ratio	Quick AssetCurrent Liabilities$$\frac{\text{Quick Asset}}{\text{Current Liabilities}}$$
Liquid Ratio	Liquid AssetCurrent Liabilities$$\frac{\text{Liquid Asset}}{\text{Current Liabilities}}$$
Solvency Ratios
Debt Equity Ratio	Long - Term DebtsShareholders Funds$$\frac{\text{Long - Term Debts}}{\text{Shareholders Funds}}$$
Debt to Capital Employed Ratio	Long - Term DebtsCapital Employed or Net Assets$$\frac{\text{Long - Term Debts}}{\text{Capital Employed or Net Assets}}$$
Proprietary ratio	Shareholders FundsCapital Employed or Net Assets$$\frac{\text{Shareholders Funds}}{\text{Capital Employed or Net Assets}}$$
Total Asset to Debt Ratio	Total AssetsLong - Term Debts$$\frac{\text{Total Assets}}{\text{Long - Term Debts}}$$
Interest Coverage Ratio	Net Profit Before Interest And TaxInterest on Long - Term Debts$$\frac{\text{Net Profit Before Interest And Tax}}{\text{Interest on Long - Term Debts}}$$
Activity or Turnover Ratios
Activity Turnover Ratio	Cost of Revenue From Business OperationsAverage Inventory$$\frac{\text{Cost of Revenue From Business Operations}}{\text{Average Inventory}}$$
Trade Receivable Turnover Ratio	Net Credit Revenue From Business OperationsAverage Trade Receivables$$\frac{\text{Net Credit Revenue From Business Operations}}{\text{Average Trade Receivables}}$$ Here, Average Credit Receivables = $$\text{Here, Average Credit Receivables = }$$ Opening Debtors and Bill Receivables + Closing Debtors and Bills Receivables2$$\frac{\text{Opening Debtors and Bill Receivables + Closing Debtors and Bills Receivables}}{2}$$
Trade Payable Ratio Turnover Ratio	Net Credit PurchaseAverage Trade Payables$$\frac{\text{Net Credit Purchase}}{\text{Average Trade Payables}}$$ Here, Average Credit Payables = $$\text{Here, Average Credit Payables = }$$ Opening Debtors and Bill Payables + Closing Debtors and Bills Payables2$$\frac{\text{Opening Debtors and Bill Payables + Closing Debtors and Bills Payables}}{2}$$
Net Asset or Capital Employed Turnover Ratio	Revenue From Business OperationsCapital Employed$$\frac{\text{Revenue From Business Operations}}{\text{Capital Employed}}$$
Fixed Asset Turnover Ratio	Net Revenue From Business OperationsNet Fixed Assets$$\frac{\text{Net Revenue From Business Operations}}{\text{Net Fixed Assets}}$$
Working Capital Turnover Ratio	Net Revenue From Business OperationsWorking Capital$$\frac{\text{Net Revenue From Business Operations}}{\text{Working Capital}}$$
Profitability Ratios
Gross Profit Ratio	Gross ProfitNet Revenue of Business Operations×100$$\frac{\text{Gross Profit}}{\text{Net Revenue of Business Operations}}\times 100$$
Operating Ratio	Cost of Revenue From Business Operations + Operating ExpenseNet Revenue From Business Operations×100$$\frac{\text{Cost of Revenue From Business Operations + Operating Expense}}{\text{Net Revenue From Business Operations}}\times 100$$
Operating Profit Ratio	Operating ProfitRevenue From Business Operations×100$$\frac{\text{Operating Profit}}{\text{Revenue From Business Operations}}\times 100$$ Here, Operating Profit =$$\text{Here, Operating Profit =}$$ Revenue From Business OperationsOperating Cost$$\frac{\text{Revenue From Business Operations}}{\text{Operating Cost}}$$
Net Profit Ratio	Net ProfitRevenue From Business Operations×100$$\frac{\text{Net Profit}}{\text{Revenue From Business Operations}}\times 100$$
Return on Investment (ROI) or Return on Capital Employed (ROCE)	Profit Before Interest And TaxCapital Employed×100$$\frac{\text{Profit Before Interest And Tax}}{\text{Capital Employed}}\times 100$$
Return on Net Worth (RONW) or Return on Shareholder’s Fund	Profit After TaxShareholders Fund×100$$\frac{\text{Profit After Tax}}{\text{Shareholders Fund}}\times 100$$
Earnings Per Share	Profit Available For Equity ShareholdersNumber of Equity shares$$\frac{\text{Profit Available For Equity Shareholders}}{\text{Number of Equity shares}}$$
Book Value Per Share	Equity Shareholders FundNumber of Equity shares$$\frac{\text{Equity Shareholders Fund}}{\text{Number of Equity shares}}$$
Dividend Payout Ratio	Dividend Per ShareEarning Per Share$$\frac{\text{Dividend Per Share}}{\text{Earning Per Share}}$$
Price earning ratio Earning Ratio	Market Price of ShareEarning Per Share$$\frac{\text{Market Price of Share}}{\text{Earning Per Share}}$$

Is this page helpful?