what is an accounting ratio 
accounting ratios an important subset of financial ratios are a group of metrics used to measure the management aptitude 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 they also serve as a comparison toolbox to compare the firms performance to that of its peer in the same industry understanding an accounting ratioan accounting ratio compares two line items in a company s financial statements these consist of its income statement balance sheet and cash flow statement the ratios can be used to evaluate a company s fundamentals and provide information about the performance of the company over the last quarter or fiscal year analyzing accounting ratios is an important step in determining the financial health of a company it can often point out areas that are dragging the profitability of a company down and therefore need improvement the effectiveness of new management plans new products and changes in operational procedures can all be determined by analyzing accounting ratios accounting ratios also work as an important tool in company comparison within an industry the company can see how it stacks up against its peers and investors can use accounting ratios to determine which company is their better option a thorough accounting analysis can be a complex task but calculating accounting ratios is a simple process of dividing two line items found on a financial statement that provide a quick form of clear analysis to a business owner or investor types of accounting ratiosseveral types of accounting ratios can determine various types of information the income statement contains information about company sales expenses and net income it also provides an overview of earnings and the number of shares outstanding used to calculate earnings per share eps these are some of the most popular data points that analysts use to assess a company s profitability gross profit as a percent of sales is referred to as gross margin it s calculated by dividing gross profit by sales the gross profit margin would be 80 if gross profit is 80 000 and sales are 100 000 the higher the gross profit margin the better it indicates that a company is keeping a higher proportion of revenues as profit rather than using it to meet expenses operating profit as a percentage of sales is referred to as operating margin it s calculated by dividing operating profit by sales the operating profit margin would be 60 if the operating profit is 60 000 and sales are 100 000 the balance sheet provides accountants with a snapshot of a company s capital structure one of the most important measures of capital structure is the debt to equity d e ratio it s calculated by dividing debt by equity the debt to equity ratio would be two to one if a company has debt equal to 100 000 and equity equal to 50 000 the debt to equity ratio shows how much a business is leveraged how much debt it s using to finance operations rather than its internal funds the quick ratio is also known as the acid test ratio it s an indicator of a company s short term liquidity and measures a company s ability to meet its short term obligations with its most liquid assets the ratio excludes inventories from current assets because we re only concerned with the most liquid assets in this case the cash flow statement provides data for ratios dealing with cash the dividend payout ratio is the percentage of net income paid out to investors through dividends both dividends and share repurchases are considered outlays of cash and can be found on the cash flow statement the dividend payout ratio is calculated by dividing 100 000 by 400 000 which works out to 25 if dividends are 100 000 and income is 400 000 the higher the dividend payout ratio the higher the percentage of income a company pays out as dividends rather than reinvesting back into the company 