# Management Accounting Useful Ratios - Accounting Basics

## How are the different ratios calculated?

Some of the useful ratios are calculated as follows:

Short–term Financial Position or Test of Liquidity
(a) Current Ratios
=
Current AssetsCurrent Liabilities
(b) Quick or Acid Test or Liquid Ratio
=
Liquid AssetsCurrent Liabilities
(c) Absolute Liquid Ratio
=
Absolute Liquid AssetsCurrent Liabilities
(d) Interval Measure
=
Liquid AssetsAvg.Daily Operating Expenses
Current Assets Movement (Asset Management Ratios)
(a) Inventory /Stock Turnover Ratio
=
Cost of Goods SoldAvg.Inventory at Cost
(b) Debtors or receivables Turnover Ratio/Velocity
=
(c) Average Collection Period
=
(d) Creditors / Payable Turnover Ratio / Velocity
=
(e) Average Payment Period
=
Total Trade Creditos / PayableAvg.Daily Purchase
(f) Working Capital Turnover Ratio
=
Sales or Cost of SalesNet Working Capital
Analysis of Long-term Financial Position or Test of Solvency
(a) Debt Equity Ratio
=
Outsiders FundsShareholders′ Funds

or

=
Outsiders′ EquitiesInternal Equities
(b) Funded Debt to Total Capitalization Ratio
=
Funded DebtsTotal Capitalization
× 100
(c) Ratio of Long term Debt to Shareholders, Funds (Debt Equity)
=
Long term DebtsShareholders′ Funds
(d) Proprietary or Equity Ratio
=
Shareholders FundsTotal Assets
(e) Solvency Ratio
=
Total Liabilities to OutsidersTotal Assets
(f) Fixed Assets Net Worth Ratio
=
Fixed Assets after DepreciationShareholders′ Funds
(g) Fixed Assets Ratio or Fixed Assets to Long Term Funds
=
Fixed Assets after DepreciationTotal long term Fund
(h) Ratio of Current Assets to Proprietary funds
=
Current AssetsShareholders′ Funds
(i) Debt-Service or Interest Coverage
=
Net Profit (before Int. & Taxes)Fixed Interest Charges
(j) Total Coverage or Fixed Charge Coverage
=
EBITTotal Fixed Charges
(k) Preference Dividend Coverage Ratio
=
Net Profit (before Int.& Tax)Preference Dividend
(l) Cash to debt-Service Ratio or Debt Cash Flow Coverage
=
CF
1 +
SFD1 − Tax Rate

CF = Annual cash flow before Int. & Tax

SFD = Sinking fund appropriation on debt

Analysis of Profitability
(i) General Profitability:
(a) Gross Profit Ratio
=
Gross ProfitNet Sale
× 100
(b) Operating Ratio
=
Operating CostNet Sale
× 100
(c) Expenses Ratio
=
Particular ExpenseNet Sale
× 100
(d) Net Profit Ratio
=
Net Profit after TaxNet Sale
× 100
(e) Operating Profit Ratio
=
Operating ProfitNet Sale
× 100
Overall Profitability
(a) Return on Shareholders’ Investment (RoI)
=
Net Profiti after Tax & InterestShareholders′ Fund
× 100
(b) Return on Equity Capital
=
Net Profit after Tax − Pref.DividendPaid up Equity Capital
× 100
(c) Earnings per Share (EPS)
=
Net Profit after Tax − Pref.DividendNumber of Equity Share
× 100
(d) Return on Gross Capital Employed
=
× 100
(e) Return on Net Capital Employed
=
× 100
(f) Return on Assets
=
Net Profit after TaxAvg.Total Assets
× 100
(g) Capital Turnover Ratio
=
Sale or Cost of SaleCapital Employed
× 100
(h) Fixed Assets Turnover Ratio
=
Sale or Cost of Goods SoldFixed Assets
× 100
(i) Working Capital Turnover Ratio
=
Sale or Cost of Goods SoldNet Working Capital
× 100
Market Test or Valuation Ratio
(a) Dividend Yield Ratio
=
Dividend per ShareMarket Value per Share
(b) Dividend Payout Ratio
=
Dividend per Equity ShareEarnings per Share
(c) Price/Earnings (P/E) Ratio
=
Market Price per Equity ShareEarnings per Share
(d) Earning Yield Ratio
=
Earnings per ShareMarket price per share
(e) Market Value Book Value Ratio
=
Market value per shareBook value per share
(f) Market Price to Cash Flow Ratio
=
Market price per shareCash flow per share
Market Test or Valuation Ratio
(a) Capital Gearing Ratio
=
Equity Share Capital + Reserve & SurplusPref.Capital + Long term Debt bearing Fixed Interest
(b) Total Investment to Long Term Liabilities
=
Shareholders Fund + Long term LiabilitiesLong term Liabilities
(c) Debt Equity Ratio
=
Outsiders FundsShareholders Funds
(d) Ratio to Fixed Assets to Funded Debt
=
Fixed AssetsFunded Debts
(e) Ratio of Current Liabilities to Proprietors fund
=
Current LiabilitiesShareholders′ Funds
(f) Ratio of Reserve to Equity Capital
=
ReservesEquity Share Capital
× 100
(g) Financial Leverage
=
EBITEBIT − Interest & Pref.Dividend
(h) Operating Leverage
=
ContributionEBIT