Class 12th Accounting Ratios

 Accounting ratios, also known as financial ratios, are quantitative metrics used to analyze and interpret various aspects of a company's financial performance and position. These ratios provide insights into a company's profitability, liquidity, efficiency, solvency, and overall financial health. They are crucial tools for investors, creditors, and management to make informed decisions and assess the company's performance relative to its industry peers and historical data.

Here are some common categories of accounting ratios:

1. Liquidity Ratios:

   - Current Ratio: Current Assets / Current Liabilities

   - Quick Ratio (Acid-Test Ratio): (Current Assets - Inventory) / Current Liabilities

   - Cash Ratio: Cash and Cash Equivalents / Current Liabilities

   These ratios indicate a company's ability to meet short-term obligations with its short-term assets.

2. Profitability Ratios:

   - Gross Profit Margin: (Gross Profit / Revenue) * 100

   - Net Profit Margin: (Net Income / Revenue) * 100

   - Return on Assets (ROA): (Net Income / Total Assets) * 100

   - Return on Equity (ROE): (Net Income / Shareholders' Equity) * 100

   These ratios assess the company's ability to generate profits in relation to sales, assets, and equity.

3. Efficiency Ratios:

   - Inventory Turnover: Cost of Goods Sold / Average Inventory

   - Accounts Receivable Turnover: Revenue / Average Accounts Receivable

   - Accounts Payable Turnover: Purchases / Average Accounts Payable

   These ratios measure how efficiently a company manages its resources and turnovers.

4. Solvency Ratios:

   - Debt-to-Equity Ratio: Total Debt / Shareholders' Equity

   - Debt Ratio: Total Debt / Total Assets

   - Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense

   These ratios evaluate the company's ability to meet long-term obligations and manage its debt.

5. Market Value Ratios:

   - Price-to-Earnings (P/E) Ratio: Market Price per Share / Earnings per Share

   - Price-to-Book (P/B) Ratio: Market Price per Share / Book Value per Share

   - Dividend Yield: Dividend per Share / Market Price per Share

   These ratios reflect the company's valuation in the market and its attractiveness to investors.

6. Operating Ratios:

   - Operating Margin: (Operating Income / Revenue) * 100

   - EBITDA Margin: (EBITDA / Revenue) * 100

   These ratios highlight the company's operational efficiency and profitability.

Remember that the significance of a specific ratio depends on the industry and the company's business model. Comparing ratios to industry benchmarks and historical data provides a better context for analysis. Additionally, ratios are just one part of a comprehensive financial analysis and should be considered alongside other qualitative and quantitative information.