Ch 10Accounting Ratios — Class 12 Accountancy, concept-first.

Financial statements exist to give decision-makers the financial information they need. Since companies publish these statements, both external users (investors, lenders, tax authorities) and internal…

A ratio is a mathematical relationship between two numbers, expressed as a fraction, a proportion, a percentage, or a number of times.

Ratio analysis is not just about calculating numbers — it is the bridge between raw financial data and meaningful business insight.

Ratio analysis, when done properly, improves your understanding of how efficiently a business is being run.

Ratio analysis is only as reliable as the data it is built on. Since ratios are derived from financial statements, every weakness in those statements — every accounting convention, every personal judg…

Ratios are classified in two ways: traditional classification (based on which financial statement the numbers come from) and functional classification (based on the purpose for which the ratio is calc…

Liquidity ratios measure a firm's ability to meet its short-term obligations — debts that fall due within the next twelve months. This is called short-term solvency.

The current ratio measures a firm’s ability to pay its short-term obligations (due within one year) using its short-term assets. It is the most widely used liquidity ratio.

The quick ratio, also called the liquid ratio or acid-test ratio, measures a firm’s ability to pay off its current liabilities using only its most liquid current assets.

The people who lend money to a business for a long period — banks, financial institutions, debenture holders — care about two things: getting their interest on time, and getting their principal back a…

The Debt-Equity Ratio measures the relationship between long-term debt and the equity (shareholders’ funds) of a business.

The Debt to Capital Employed Ratio measures the proportion of long-term debt in the total long-term funds of the business.

The proprietary ratio measures what portion of a company’s net assets is financed by the owners’ own money.

The Total Assets to Debt Ratio tells you how safely a company’s long-term debts are covered by its total assets.

The Interest Coverage Ratio answers a simple but critical question: can the business earn enough profit to pay the interest on its long-term loans? Lenders care deeply about this ratio because it tell…

Activity ratios measure how efficiently a business uses its assets to generate sales. They are also called turnover ratios because they show how many times an asset (or a group of assets) is "turned o…

The Inventory Turnover Ratio tells you how many times a business sells and replaces its stock of finished goods during an accounting period.

The Trade Receivables Turnover Ratio measures how efficiently a business collects the money owed by its credit customers.

Trade Payable Turnover Ratio measures how quickly a business pays off its suppliers. Since trade payables (creditors and bills payable) arise from credit purchases, this ratio shows the relationship b…

The Net Assets Turnover Ratio (also called the Capital Employed Turnover Ratio) measures how efficiently a business uses its total long-term funds (capital employed) to generate revenue from operation…

Profitability ratios measure the earning capacity of a business. The profit earned is the outcome of how efficiently the resources of the business are used.

The Gross Profit Ratio measures the gross margin earned by a business as a percentage of its revenue from operations.

The operating ratio measures how efficiently a business manages its core operating costs. It tells you what percentage of revenue from operations is consumed by the cost of goods sold and the day-to-d…

The operating profit ratio measures the operating margin — the profit a business earns from its core operations, before considering finance costs and non-operating items.

The net profit ratio is a comprehensive measure of profitability. Unlike the gross profit ratio, which only considers direct costs, the net profit ratio takes into account all expenses and incomes — b…

Return on Capital Employed (ROCE), also called Return on Investment (ROI), is a profitability ratio that measures how efficiently a business uses its long-term funds to generate profit.

This ratio answers the single most important question for an equity shareholder: Is my money earning enough? It measures the overall profitability of the business from the owners' perspective, after a…

Earnings per Share (EPS) is a ratio that tells you how much profit a company has earned for each equity share it has issued.

The Book Value per Share (BVPS) ratio tells an equity shareholder the net worth backing each share they hold.

The Dividend Payout Ratio measures what portion of a company’s earnings is actually paid out to shareholders as dividends.

The Price/Earning (P/E) Ratio is a profitability ratio that connects the market's perception of a company's shares with its actual earnings performance.

The key terms introduced in this chapter, with a short meaning for each.

- Liquidity Ratios measure short-term solvency. Current Ratio = Current Assets / Current Liabilities (ideal 2:1).

Sample papers and previous-year board questions for this subject.