accounting ratio (financial ratio)
Definition
A ratio calculated from two or more figures taken from the financial statements of a company in order to provide an indication of the financial performance and position of that company. Ratios may be expressed as a percentage (e.g. return on capital employed) or as a multiple (e.g. rate of turnover).
Example
Example 1:
A financial analyst reviewing Access Bank’s annual report calculates key accounting ratios like return on equity and loan-to-deposit ratio, giving him a quick, clear picture of the bank’s profitability and financial strength without reading every line of the accounts.
Example 2:
Before investing in Apple, a Wall Street analyst calculates several accounting ratios, including profit margin and return on capital employed, to compare Apple’s financial performance against Microsoft and determine which stock offers better value.