Accountancy Ratios

Here are short notes and formulas for major accountancy ratios, categorized by type:

1. Profitability Ratios

Measure a company’s ability to generate profit.

• Gross Profit Margin
  

  $$ \text{Gross Profit Margin} = \left( \frac{\text{Gross Profit}}{\text{Revenue}} \right) \times 100 $$

  
  Indicates profit after direct costs (COGS).

• Net Profit Margin
  

  $$ \text{Net Profit Margin} = \left( \frac{\text{Net Profit}}{\text{Revenue}} \right) \times 100 $$

  
  Shows overall profitability after all expenses.

• Return on Capital Employed (ROCE)
  

  $$ \text{ROCE} = \left( \frac{\text{EBIT}}{\text{Capital Employed}} \right) \times 100 $$

  
  Measures efficiency in using capital (Capital Employed = Equity + Debt).

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2. Liquidity Ratios

Assess short-term financial health.

• Current Ratio
  

  $$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$

  
  Ideal: 2:1. Tests ability to cover short-term debts.

• Quick (Acid-Test) Ratio
  

  $$ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} $$

  
  Stricter measure (excludes inventory). Ideal: 1:1.

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3. Efficiency Ratios

Evaluate operational effectiveness.

• Inventory Turnover
  

  $$ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} $$

  
  Higher = better inventory management.

• Receivables Days
  

  $$ \text{Receivables Days} = \left( \frac{\text{Accounts Receivable}}{\text{Credit Sales}} \right) \times 365 $$

  
  Measures how quickly customers pay.

• Payables Days
  

  $$ \text{Payables Days} = \left( \frac{\text{Accounts Payable}}{\text{Credit Purchases}} \right) \times 365 $$

  
  Shows how quickly a company pays suppliers.

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4. Gearing (Leverage) Ratios

Measure financial risk and debt reliance.

• Debt-to-Equity Ratio
  

  $$ \text{Debt-to-Equity} = \frac{\text{Total Debt}}{\text{Total Equity}} $$

  
  High ratio = higher financial risk.

• Interest Cover
  

  $$ \text{Interest Cover} = \frac{\text{EBIT}}{\text{Interest Expense}} $$

  
  Ability to pay interest from profits (Ideal: >3x).

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5. Investment Ratios

For shareholder returns.

• Earnings Per Share (EPS)
  

  $$ \text{EPS} = \frac{\text{Net Profit}}{\text{Number of Shares}} $$

• Price-to-Earnings (P/E) Ratio
  

  $$ \text{P/E} = \frac{\text{Market Price per Share}}{\text{EPS}} $$

  
  Higher P/E = growth expectations.

• Dividend Yield
  

  $$ \text{Dividend Yield} = \left( \frac{\text{Dividend per Share}}{\text{Market Price per Share}} \right) \times 100 $$

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Key Notes:

• Profitability → Focus on margins and returns.
• Liquidity → Short-term solvency.
• Efficiency → Asset/utilization management.
• Gearing → Debt vs. equity structure.
• Investment → Shareholder value metrics.

These ratios help analyze financial statements for decision-making. Adjust formulas based on context (e.g., using EBITDA instead of EBIT).

Would you like a deeper dive into any specific ratio?