Accounting ratios, also known as financial ratios, are used to measure the efficiency and profitability of a company based on its financial reports. They provide a way of expressing the relationship between one accounting data point to another, and are the basis of ratio analysis.
Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a companys financial statements balance sheet
There are four types of Accounting Ratios with formulas This first type of accounting ratio formula is used for ascertaining the liquidity position of the company. It is used for determining the paying capacity of the company towards its short term liabilities. A high liquidity ratio indicates that the cash position of the company is good. Accounting ratios definition and meaningThe accounting ratio is a measurement of the company’s financial health. It is used to compare different companies’ financial performance in order to determine the strength of their financial health, which in turn helps investors decide if the company is worth investing in. Accounting ratios are used in the analysis of all companies, but there are some that are more important than others.