Introduction

Accounting ratios are used to express relationships between one accounting result and another
accounting result; ratios are used basically for comparative purposes, they measure financial
results of an organisation or entity on various parameters such as liquidity, profitability, activity,
solvency etc. Ratio analysis forms an important constituent of financial statements analysis and
helps in assessing overall financial health of an organisation.
List of Ratios
1. Growth in sales%
Growth in sales provides information on sales, it indicates whether sales have increased or
decreased over a period of time. It is usually measured in percentage. It is used by organisations
to see whether there sales have increased or decreased when compared to previous sales figures.
Growth in sales% is usually calculated to compare results of different periods, such as in
different months, different years etc.

2. Gross Profit margin
It is a profitability ratio, which is used to assess the amount left after revenue is adjusted for cost
of goods sold. The formula to calculate Gross profit margin is
(Revenue Cost of Goods sold)/ Revenue
Gross profit margin is an indicator of financial health, the higher the margin the greater is the
amount left for paying operating and other expenses any major changes to Gross profit margin
indicates a thorough check on pricing strategies.




3. Gross Profit mark up
Gross profit mark up % is used in many ways, it provides the difference between a products cost
and its selling price, in the case of gross profit margin, it is calculated as a percent of the selling
price (sales), where as in gross profit mark up it is calculated as a percentage of the sellers cost
or cost of goods sold, it is calculated as follows
(Selling Price Cost of goods sold)/ Cost of goods sold

4. Administration expenses %
It is an expense ratio, which is used to calculate administration expenses to net sales. This ratio is
calculated to figure out the amount of administration expenses that are paid out from sales
revenue. This ratio helps to control any misuse or over spending on administration activities. It is
calculated as follows
(Administration expenses)/ Net sales * 100

5. Selling expenses%
Like administration expenses, selling expenses are also important expense part for an
organisation, selling expenses includes commission to sales persons, transport and other
miscellaneous expenditure associated to sales. It is calculated as follows
(Selling expenses)/Net sales)* 100





6. Financial expenses%
Financial expenses % ratio Is also a type of expense ratio, most organisations require to pay
interests on loans, overdrafts, taxes etc, all these expenses are financial in nature, hence it is
important to determine financial expenses % to compare results with previous results so that
financial planning can be more effective. It is calculated as follows
(Financial expenses)/Net sales * 100

7. Net Profit (before tax)%
Net profit (before tax)% is calculated to find out the profits available for a company after
adjusting all kinds of expenses including depreciation, general, administrative, selling and
distribution expenses. It is the amount available to the company before it pays corporate tax. The
higher the net profit, more are the funds available to pay tax, dividends, buy assests or transfer to
surplus reserve. It is calculated as follows
(Net Profit)/ Revenue * 100
Where net profit = Revenue Cost of goods sold all expenses (excluding taxes)

8. Return on Equity (ROE)
It is a profitability ratio which gives out the amount of net income as a percentage of
shareholders equity, it is calculated as follows
Net Income/ Shareholders equity
This ratio helps in measuring a companys profitability, by assessing the profit a company it
generates with the money invested by shareholders.


9. Return on Assets
This ratio indicates the companys profits relative to its total assets; this ratio is very helpful, as it
helps in efficient management of assets so that they generate maximum earnings. In public
companies, assets include both debt and equity; hence both are used for financing the operations
of a company. It is calculated as follows
Net Income/ Total Assets

10. Inventory Turnover ratio
This ratio is used to calculate the number of times a companys inventory is sold and replaced
during a particular period, it is normally used to compare against industry averages, a low
turnover ratio implies poor sales and a high ratio may mean strong sales or ineffective buying, it
is calculated as
Sales/ Inventory

11. Age of Accounts Receivable
It is used to calculate the length of time that a debtor takes to pays off debt from the date of
invoice, it is very useful to calculate this ratio, as it helps in effective management of debtors,
and is also helpful for maintaining liquidity in the company. It is primarily presented as a
periodic report.





12. Current Ratio
It is a type of liquidity ratio which measures a companys ability to pay its short term liabilities, a
higher ratio indicates more capability of a companys ability to pay off its short term liabilities,
and it is calculated as follows
Current Assets/ Current Liabilities
Where current assets include cash, marketable securities, inventory and receivables
13. Liquid Ratio
Liquid ratio also known as Acid test ratio or quick ratio, it measures the ability of a company to
use its near cash or quick assets to extinguish or retire its current liabilities immediately. A
company with a Quick Ratio of less than 1 cannot currently fully pay back its current liabilities.
It is calculated as follows
(Cash+ Marketable securities+ Receivables) /Current Liabilities
Note: Inventory is not considered in this ratio

14. Debt Equity Ratio
It is a measure of a companys financial leverage, it is used to calculate the proportion of equity
and debt the company is using to finance its assets. It is calculate as follows
Total Liabilities/ Shareholders equity





15. Equity Ratio
The equity ratio is a financial ratio indicating the relative proportion of equity used to finance a
company's assets, it is calculate as follows
Shareholders funds / Total assets

16. Interest Cover

It is a ratio used to determine how easily a company can pay interest on outstanding debt. The
lower the ratio, the more the company is burdened by debt expense. It is calculated as follows
Earnings before Interest & Tax (EBIT) / Interest Expense