Definition of Accounting Ratios
Accounting ratios, which are also known as financial ratios, are one part of financial statement analysis. Accounting ratios will often relate one financial statement amount to another financial statement amount. For instance, the inventory turnover ratio divides a company's cost of goods sold for a recent year by the company's average inventory during that year.
Perhaps the most frequently used accounting ratio is the current ratio, which divides a company's current assets by its current liabilities.
A company's accounting ratios can be compared to the ratios of other companies in the same industry. An accounting ratio can also be compared to the company's same ratio in recent periods to see whether the company is improving or declining.
Examples of Accounting Ratios
In addition to the inventory turnover ratio and the current ratio, here are some additional accounting/financial ratios:
- Quick ratio
- Debt to equity ratio
- Accounts receivable turnover ratio
- Days' sales in inventory
- Interest coverage ratio
- Gross margin ratio
- Return on assets ratio
- Profit margin (after tax) ratio
- Total assets turnover ratio
- Times interest earned ratio
To assist you in computing and understanding accounting ratios, we developed 24 forms that are available as part of AccountingCoach PRO.
You can also read our Explanation of Financial Ratios.
