Accounting ratios

Updated: Aug 20, 2021

In assessing the viability or performance of a business, certain ratios are often considered to be of particular importance. In so far as these ratios are calculated from the figures appearing in the accounts of the business they are known as accounting ratios. There are many such ratios and their relative importance varies with both the priorities of the person using them and the purpose for which they are used, e.g. in looking to see if the business is solvent the immediate ratios to consider are the liquid ratio and the current ratio.

Many analysts see the ratio of return on capital as the most important of all in any serious investigation and will be interested more in the movement, or trend, of that ratio than in its absolute value at a particular time. Generally speaking, trends are always of greater relevance than absolute values.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
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