BREAKING NEWS

BREAKING NEWS ""**Expected DA for Bank Employees from Aug 2024 MINIMUM 7 SLAB AND MAXIMUM 24 SLAB*****I *****

VISITOR FROM WORLD

Free counters!

YOU ARE VISITOR

Blog Archive

LIVE

BREAKING NEWS ""**If we want PSU bank to compete with Pvt bank ---Give them a break Saturday first****Outcome of Today’s meeting with IBA - 31.01.2023*********

Friday, August 26, 2022

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.


  1. 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.


  1. 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


  1. 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


  1. 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


  1. 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

Quick Ratio

Quick AssetCurrent Liabilities

Liquid Ratio

Liquid AssetCurrent Liabilities

Solvency Ratios

Debt Equity Ratio

Long - Term DebtsShareholders Funds

Debt to Capital Employed Ratio

Long - Term DebtsCapital Employed or Net Assets

Proprietary ratio

Shareholders FundsCapital Employed or Net Assets

Total Asset to Debt Ratio

Total AssetsLong - Term Debts

Interest Coverage Ratio

Net Profit Before Interest And TaxInterest on Long - Term Debts

Activity or Turnover Ratios

Activity Turnover Ratio

Cost of Revenue From Business OperationsAverage Inventory

Trade Receivable Turnover Ratio




Net Credit Revenue From Business OperationsAverage Trade Receivables


Here, Average Credit Receivables = 


Opening Debtors and Bill Receivables + Closing Debtors and Bills Receivables2


Trade Payable Ratio Turnover Ratio

Net Credit PurchaseAverage Trade Payables


Here, Average Credit Payables = 


Opening Debtors and Bill Payables + Closing Debtors and Bills Payables2

Net Asset or Capital Employed Turnover Ratio

Revenue From Business OperationsCapital Employed

Fixed Asset Turnover Ratio

Net Revenue From Business OperationsNet Fixed Assets

Working Capital Turnover Ratio

Net Revenue From Business OperationsWorking Capital

Profitability Ratios 

Gross Profit Ratio

Gross ProfitNet Revenue of Business Operations×100

Operating Ratio

Cost of Revenue From Business Operations + Operating ExpenseNet Revenue From Business Operations×100

Operating Profit Ratio

Operating ProfitRevenue From Business Operations×100


Here, Operating Profit =
Revenue From Business OperationsOperating Cost

Net Profit Ratio

Net ProfitRevenue From Business Operations×100

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

Profit Before Interest And TaxCapital Employed×100

Return on Net Worth (RONW) or Return on Shareholder’s Fund

Profit After TaxShareholders Fund×100

Earnings Per Share

Profit Available For Equity ShareholdersNumber of Equity shares

Book Value Per Share 

Equity Shareholders FundNumber of Equity shares

Dividend Payout Ratio

Dividend Per ShareEarning Per Share

Price earning ratio





Earning Ratio

Market Price of ShareEarning Per Share

Is this page helpful?








No comments:

8th Pay Commission Update: Performance Based Salary may be introduced for Government Employees

With discussions around salary revisions gaining momentum, the possibility of the  8th Pay Commission  is a topic of significant interest am...

script async src="https://pagead2.googlesyndication.com/pagead/js/adsbygoogle.js">