What Is an Accounting Ratio?

Accounting ratios, an important subset of financial ratios, are a group of metrics used to measure the management aptitude, efficiency, and profitability of a company based on its financial reports. They provide a way of expressing the relationship between one accounting data point to another and are the basis of 澳洲幸运5开奖号码历史查询:ratio analysis. ﷽They also serve as a way to compare the firm's performance to its competitors🥀.

Why Accounting Ratios Matter

An accounting ratio compares two line items in a company’s 澳洲幸运5开奖号码历史查询:financial statements. These consist of its income statement, balance sheet, and cash flow statement. The ratios can be used to evaluate a company’s 澳洲幸运5开奖号码历史查询:fundamentals and provide information about the performance of the company over the last quarter or fiscal year.

Analyzing accounting ratios is an important step in determining the financial health of a company. They can often point out areas that are dragging the profitability of a company down and therefore need improvement. The effectiveness of new management plans, new products, and changes in 𓆉operational procedures can all be determined by analyzing accounting ratios.

Accounting ratios also work as an important comparison tool. The company and its investors can see how it stacks up against its competi♊tors.

Types of Accounting Ratios

Gross Margin and Operating Margin

The income statement contains information about a company's sales, expenses, and net income. It also provides an overview of earnings and the number of 澳洲幸运5开奖号码历史查询:shares outstanding used to calculate 澳洲幸运5开奖号码历史查询:earnings per share (EPS). These are some of the mo🦹st popular data points that analysts use to assess a company’s profitability.

澳洲幸运5开奖号码历史查询:Gross profit as a percent of sales is referred to as 澳洲幸运5开奖号码历史查询:gross margin. It's calculated by dividing gross profit by sales. If gross profit is $80,000 and sales are $100,000, the gross profit margin would be 80%. The higher the gross profit margin, the better. It indicates that a company is keeping a higher proportion of revenues as profit rather than using them to meet 🦩expenses.

澳洲幸运5开奖号码历史查询:Operating profit as a percentage of sales is referred to as 澳洲幸运5开奖号码历史查询:operating margin. It's calculated by dividing operating profit by sales. If the operating profit is $60,000 and sales are $100,000, the operat𒁃ing profit margin would be 60%.

Debt-to-Equity Ratio

The 澳洲幸运5开奖号码历史查询:balance sheet provides you with a snapshot of a company’s capital structure. One of the most important measures of capital structure is the 澳洲幸运5开奖号码历史查询:debt-to-equity (D/E) ratio.

It's calculated by dividing debt by equity. If a company has debt equal to $100,000 and equity equal to $50,000, the debt-to-equity ratio would be two to one. The debt-to-equity ratio shows how much a business is leveraꦰged—that is, how much debt it's using to finance operations rather than its internal funds.

The Quick Ratio

The 澳洲幸运5开奖号码历史查询:quick ratio is also known as the 澳洲幸运5开奖号码历史查询:acid-test ratio. It's an indicator of a company’s short-term 澳洲幸运5开奖号码历史查询:liquidity and measures a company’s abil🍌ity to meet its short-term obligations with its most liquid assets. The ratio excludes inventories from current assets because we're only concerned with the most liquid assets in this c𝐆ase.

Dividend Payout Ratio

The 澳洲幸运5开奖号码历史查询:cash flow statement provides data for ratios dealing with cash. The 澳洲幸运5开奖号码历史查询:dividend payout ratio is the percentage of net income paid out to investors through 澳洲幸运5开奖号码历史查询:dividends. Both dividends and 澳洲幸运5开奖号码历史查询:share repurchases are considered outlays of cash and can be found on the cash flow stateme🍸nt.

If dividends are $100,000 and income is $400,000, the dividend payout ratio is calculated by dividing $100,000 by $400,000, which works out to 25%. The higher the dividend payout ratio, the higher the percentage of in🌠come a company pa♌ys out as dividends rather than reinvesting back into the company.

The Bottom Line

Accounting ra🦩tios can provide an accurate ass🃏essment of the profitability of a company over the last quarter or fiscal year. They include the debt-to-equity ratio, the quick ratio, the dividend payout ratio, the gross margin, and the operating margin.

These are just a few examples 𝐆of the many accounting tools that corporations and analysts use to evaluate a company, however. Many other tools highlight different aspects of a company, so you’ll want to explore and potentially use them as well.