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Accounting Ratios Analysis/Financial Ratios Analysis:

Learning Objectives:

After studying this topic you should be able to:
Define, explain, calculate and interpret the various accounting ratios.
Explain the significance and usefulness of different ratios
Explain the limitations of using ratios analysis


There are many special measurements that may be developed from financial statements and supplementary financial data. Such measurements may be divided into:
  • Those that analyze balance sheet position, and
  • Those that analyze operating results.

Some of these measurements have special significance to particular groups, while others may be of general interest to all groups. Creditors, for example, are concerned with the ability of a company to pay its current obligations and seek information about the relationship of current assets to current liabilities. Shareholders are concerned with dividends and seek information relating the earnings per share that will form the basis for dividend declarations. Management is concerned with the liquidity of stock of goods and seek information relating to the number of times stock have turned over during the period. All parties are vitally interested in the profitability of operations and wish to be informed about the relationship of earnings to both creditors and shareholders.

A number of measurements developed from financial statements will be explained effectively through using accounting ratios. It is fact that ratio analysis is one of the tools of the financial analysis. It is used to diagnose the financial health of an enterprise.

Read our high quality articles about "accounting ratios analysis" topic:
Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratios
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis




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