Accounting Ratios Definition | Learn With Finance Strategists | Your Online Finance Dictionary

hi i'm rainey with finance strategist in this lesson we're going to cover accounting ratios include a wide array of ratios that are used by accountants and other financial professionals which act as different indicators that measure profitability liquidity and potential financial distress in the company's financials often accounting ratios are calculated yearly or quarterly and different ratios are more important to different industries for example the inventory turnover ratio would be significantly important to a retailer but have almost no significance to a boutique advisory firm [Music] the financial reports that accounting ratios are based on paint a picture of where a company came from how they are doing currently and where they are going in the future three common accounting ratios include debt ratios liquidity ratios and profitability ratios common debt ratios sometimes called solvency ratios these measure a company's long-term ability to pay off its debt obligations debt to equity ratio equals total liabilities divided by shareholder equity or total this describes to what extent a company is financed by debt relative to equity debt ratio is total liabilities divided by total assets this measures how much of a company's assets are financed by debt in other words it's financial leverage common liquidity ratios these measure a company's ability to meet short-term obligations current ratio is current assets divided by current liabilities this measures the capability of a business to meet its short-term obligations that are due within a year quick ratio is current assets minus inventory minus prepaid expenses divided by current liabilities this measures the company's ability to pay its short-term debts with its most liquid assets common profitability ratios these measure a business's ability to generate profits relative to its revenue return on equity is net income divided by average shareholder equity this measures the profits made for each dollar of shareholders equity gross margin is gross profit divided by net sales this is the profitability of a business after subtracting the cost of goods sold from the revenue some include turnover ratios which measure how efficiently assets of a company are used to generate revenue and earnings ratios which measure returns that the company generates for its shareholders there is no single accounting ratio which tells the whole story a savvy investor knows how to use accounting ratios to determine whether a stock presents a lucrative opportunity or perhaps a liability that other investors have yet to realize let's hear from you what do you think is the most important type of ratio leave a comment below [Music] for more information visit finance strategist strategies for you

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