Financial Statement Analysis - Types of Key Accounting Ratios

There are several different key accounting ratios and they are categorized according to the financial characteristic they measure. These are:

• Solvency
• Profitability
• Performance
• Investment

This Accounting Terminology Checklist outlines the terminology, concepts and conventions that are accepted within the accounting profession.

An organization is considered to be solvent when it can pay its debts as they fall due. In day-to-day terms, this means that an organization has enough working capital to pay its suppliers.

key accounting ratios and solvency

These ratios measure the organization's use of its assets and control of its expenses to generate an acceptable rate of return. You can see if an organization is profitable simply by looking at an income statement, but you need to put that profit into perspective.

To do this you need to ask yourself:

• Is the profit growing in proportion to the size of the organization?
• Is the organization making as much profit on new sales as on existing sales?
• Is the organization as profitable as others in the same sector?

Is the organization making the sort of profit that it has in the past or that others in the same sector are making? By looking at individual parts of the organization you can gain more insight into their profitability and efficiency.

These ratios measure investor response to owning an organization's stock and also the cost of issuing stock. They are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in an organization's shares.

Trends are more revealing than one-off figures

Remember that with most of these measures, the trend over time is often more revealing than one figure in isolation, and that comparisons between industries may not be very useful.

You may also be interested in:
Financial Statement Analysis | Key Accounting Ratios | Current Ratio Analysis | Calculating Profit | Business Performance Ratios | Price/Earnings Ratios | Price-to-Book Ratio | PEG (Price/Earnings to Growth) Ratio | Dividend Yield.

Key Points

  • There are several different key accounting ratios that can be classified by the characteristic they measure: for example, solvency, profitability, performance, and investment history.
  • The trend over time is often more revealing than any one figure in isolation.
More Free eBooks

Today's Top Picks for Our Readers:
Recommended by Recommended by NetLine


Top Trending Free eBooks