Accounting Ratio

An accounting ratio is a financial metric used to evaluate the performance, efficiency, and financial health of a company by comparing two related figures from the financial statements. These ratios provide insights into various aspects of a company’s operations, including profitability, liquidity, solvency, and efficiency. Accounting ratios are essential tools for investors, analysts, and management to make informed decisions about a company’s financial status. Common accounting ratios include the current ratio (liquidity), return on equity (profitability), debt-to-equity ratio (solvency), and inventory turnover ratio (efficiency).

Example

The debt-to-equity ratio is an accounting ratio that compares a company’s total liabilities to its shareholders’ equity, indicating how much debt the company is using to finance its operations relative to its equity.