Accounting ratios, also known as financial ratios, are quantitative tools used to evaluate a company's financial performance and position. These ratios are calculated using figures from financial statements—such as the balance sheet and income statement—to provide insights into a business’s profitability, liquidity, efficiency, and solvency.

There are several categories of accounting ratios, including:

• Profitability Ratios – Measure a company’s ability to generate earnings, such as net profit margin and return on equity (ROE).

• Liquidity Ratios – Assess the company’s ability to meet short-term obligations, such as the current ratio and quick ratio.

• Efficiency Ratios – Evaluate how effectively the company uses its assets, including inventory turnover and accounts receivable turnover.

• Solvency Ratios – Indicate long-term financial stability, such as the debt-to-equity ratio and interest coverage ratio.

Accounting ratios help internal users (like management) make informed business decisions and also assist external users (such as investors, lenders, and regulators) in assessing a company’s performance and financial health.

By comparing ratios over time or against industry benchmarks, businesses can identify trends, strengths, weaknesses, and opportunities for improvement. In summary, accounting ratios are vital tools for financial analysis and strategic planning.