## What Is an Accounting Ratio?

Accounting ratios, an important sub-set of financial ratios, are a group of metrics 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.

## What Do Accounting Ratios Tell You?

An accounting ratio compares two line items in a company’s financial statements, namely made up of its income statement, balance sheet and cash flow statement. These 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.

Examples of financial ratios include the following:

• Gross margin
• Operating margin
• Debt-to-equity ratio
• Quick ratio
• Payout ratio

Each of these ratios requires the most recent data in order to be relevant.

### Key Takeaways

• Accounting ratios, an important sub-set of financial ratios, are a group of metrics used to measure the efficiency and profitability of a company based on its financial reports.
• An accounting ratio compares two line items in a company’s financial statements, namely made up of its income statement, balance sheet and cash flow statement.
• These 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.

## Examples of Accounting Ratios

### Gross Margin and Operating Margin

The income statement contains information about company sales, expenses, and net income. It also provides an overview of earnings per share and the number of shares outstanding used to calculate it. These are some of the most popular data points analysts use asses a company’s profitability.

Gross profit as a percent of sales is referred to as gross margin. It is calculated by dividing gross profit by sales. For example, if gross profit is \$80,000 and sales are \$100,000, the gross profit margin is 80%. Operating profit as a percentage of sales is referred to as operating profit margin. It is calculated by dividing operating profit by sales. For example, if the operating profit is \$60,000 and sales are \$100,000, the operating profit margin is 60%.

### Debt-to-Equity Ratio

The balance sheet provides accountants with a snapshot of a company’s capital structure, one of the most important measures of which is the debt-to-equity (D/E) ratio. It is calculated by dividing debt by equity. For example, if a company has debt equal to \$100,000 and equity equal to \$50,000, the debt-to-equity ratio is 2 to 1.

### The Quick Ratio

The quick ratio, also known as the acid-test ratio, is 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. Because we're only concerned with the most liquid assets, the ratio excludes inventories from current assets.

### Dividend Payout Ratio

The cash flow statement provides data for ratios dealing with cash. For example, the payout ratio is the percentage of net income paid out to investors. Both dividends and share repurchases are considered outlays of cash and can be found on the cash flow statement. For example, if dividends are \$100,000, share repurchases are \$100,000, and income is \$400,000, the payout ratio is calculated by dividing \$200,000 by \$400,000, which is 50%.