Accounting Ratios

Accounting Ratio Definitions

Acid Test Ratio
Indicator of a company's financial strength (or weakness) calculated by taking current assets minus inventories, accruals, and prepaid items, divided by current liabilities. Also called the quick ratio.

After-tax Profit Margin
Ratio of net income to net sales, where sales.

AR Turn
Accounts receivable turnover. The ratio of net credit sales to average accounts receivable. Accounts receivable turnover is measure of how quickly the customers/clients of a business pay for the products/services delivered on account.

Asset/Equity Ratio
Ratio of total assets to stockholder equity.

Asset Turnover
Ratio of net sales to total assets.

Before-tax Profit Margin
Ratio of net income before taxes to net sales.

Book Value Per Share
Ratio of stockholder equity to the average number of common shares. Book value per share is not always an indicator of economic worth, since it reflects accounting valuation and not necessarily market valuation.

Current Ratio
Indicator of short-term debt paying ability determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.

D/E Ratio
(1) Debt/equity ratio.

(2) Ratio of bonds to stocks in a portfolio.

Earnings/Price Ratio (EPR)
Earnings-to-price ratio, where earnings equal net income for a company during a period. Same as the E/P ratio.

Inventory Turnover
Ratio of annual sales to inventory. Low turnover is an unhealthy sign, indicating excess stockpiles and/or poor sales.

Long Term Debt/Capitalization
Indicator of financial leverage that shows long term debt as a proportion of the capital available. Determined by dividing long term debt by the sum of long term debt, preferred stock, and common stockholder equity.

Long Term Debt to Equity Ratio
Capitalization ratio comparing long-term debt to shareholders' equity.

Net Operating Margin
Ratio of net operating income to net sales.

Return on Assets (ROA)
Indicator of corporate profitability, determined by dividing net income for the past 12 months by total assets. Result is shown as a percentage.

Return on Equity (ROE)

Return on Investment (ROI)

Return on Total Assets
Ratio of earnings available to common stockholders to total assets.

Short Term Solvency Ratios
Ratios used to judge the adequacy of liquid assets for meeting short-term obligations as they come due, including: (a) the current ratio, (b) the acid-test ratio, (c) the inventory turnover ratio, and (d) the accounts receivable turnover ratio.

Total Asset Turnover
Ratio of net sales to total assets.

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