Table of Contents
What is Accounting Ratio?
An accounting ratio measures a company’s financial performance. There are many different kinds of ratios, each one measuring a different dimension of financial performance.
Accounting ratios use values from a company’s financial statements: the income statement, balance sheet, and cash flow statement.
They give insight into how much better or worse the company has performed when compared to the previous accounting period.
What Are The Kinds of Accounting Ratios?
Accounting ratios can be broadly divided into 6 major types:
- Market Prospect
Debt to Equity Ratio
Let’s take the example of the debt-to-equity ratio to understand why accounting ratios are important.
The debt-to-equity ratio shows how much debt a company has when compared to its assets. The higher this ratio is, the harder it will be for the company to cover its liabilities.
Debts include long-term and short-term loans, due vendor payments and equity includes shareholder’s equity.
This ratio is used by banks and other lenders to determine how likely and quickly the business will be able to repay any loans.
The Bottom Line
Along with strong financials, businesses need a solid bank to support growth.