Definition
An accounting ratio is a mathematical comparison of two financial statement items. It is used to measure the performance of a company and to compare it to other companies in the same industry.
Importance
Accounting ratios are important because they provide a quick and easy way to measure the financial health of a company. They can be used to compare a company’s performance to that of its competitors, to identify potential problems, and to make decisions about investments.
Example
One example of an accounting ratio is the current ratio. This ratio measures a company’s ability to pay its short-term debts. It is calculated by dividing a company’s current assets by its current liabilities.
Table
Current Ratio
Current Assets / Current Liabilities
Key Takeaways
- Accounting ratios are mathematical comparisons of two financial statement items.
- They are used to measure the performance of a company and to compare it to other companies in the same industry.
- Examples of accounting ratios include the current ratio, debt-to-equity ratio, and return on assets.
- Accounting ratios can be used to identify potential problems and to make decisions about investments.
Conclusion
Accounting ratios are an important tool for measuring the financial health of a company. They provide a quick and easy way to compare a company’s performance to that of its competitors and to identify potential problems. By understanding and using accounting ratios, investors and business owners can make informed decisions about investments and other financial matters.
