Accounting Ratios What They Do

Question	Answer
Gross Profit Ratio	Measures Gross Profit per dollar of Sales
Net Profit Ratios	Net Profit per Dollar of Sales
Rate of Return on Owner's Equity	Return on investment or assets provided by owners
Rate of Return on Total Assets	Return on all assets whether provided by owners or external parties
Current Ratio	Liquidity or ability to meet current debts with current assets
Quick Asset Ratio	Ability to meet immediate debts using only most liquid assets
Lincoln financial health ratio	Cash available to meet short term commitments
Equity Ratio	Percentage of assets or funds provided by owners and extent of gearing
Debt Ratio	Percentage of assets or funds provided by external parties, and extent of gearing
Lincoln debt ratio	An alternative extent of gearing
Times interest earned	Available profits to meet interest expense
Turnover of Inventories	How quickly inventory is sold, and thus indicates liquidity of inventories
Turnover of Accounts Receivable	Effectiveness of collections and whether accounts receivable are too high
Fixed Asset Turnover	Compare to competitor or industry average. Higher value is generally better.
Working Capital Turnover	In general high turnover indicates an efficient operation. High indicates the business has limited need to borrow money. May give competitive advantage. Low indicates the business is investing too much in accounts receivable and inventory.
Accounts Payable Turnover	Usually calculated on an annual basis. Higher value generally favourable. Important to suppliers.

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