Using Financial Ratios
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This accounting information can then be used to evaluate both the short-term and long-term prospects of the business.
The main accounting equation is the basis for understanding the financial statements:
| Assets = Liabilities + Owner's Equity |
To Review the Accounting Equation Click Here.
From this accounting foundation, each of the financial statement can now be analyzed to evaluate various aspects of the business.
We can apply accounting ratios to financial statements to measure various performance indicators of the business, most notably:
Key Performance Indicators
| 1.Financial Condition and Liquidity |
| 2.Management Efficiency |
| 3.Profitability |
| 4.Growth Rates |
| 5.Investment Returns |
The accounting ratios below are categorized into the key indicator of the business measured, as well as the main financial statement used with each accounting ratio. Simply click on each link for the financial ratios definitions with illustrations.
Accounting Ratios Used to Analyze the Balance Sheet
1). Financial Condition and Liquidity
a). Short Term Financial Condition and Liquidity
Current Ratio
Quick Ratio
Working Capital
b). Long Term Financial Condition and Liquidity
Book Value
Debt Equity Ratio
Interest Coverage Ratio (Income Statement)
Debt Service Coverage Ratio
Leverage Ratio
Accounting formulas used with examples of balance sheets
2). Management Efficiency
Accounts Receivable Turnover
Asset Turnover Ratio
Inventory Turnover Ratio
Accounting Ratios Used to Analyze the Income Statement
3). Profitability
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
4). Growth Rates
Sales
Net Income
5). Investment Returns
Return on Capital
Return on Equity
Return on Assets
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