Question

• Financial ratios can be divided into four categories, depending upon the purpose of the analysis. Discuss the four categories: internal liquidity, operating performance, risk analysis and growth analysis.
• Requirements: 250 words

Answer 1

Financial ratios can be divided into four categories, depending upon the purpose of the analysis. The four categories:

Internal liquidity,

Operating performance,

Risk analysis and

Growth analysis.

• LIQUIDITY RATIOS - liquidity show availability of cash and debt over short term. And ratio show comparison between two thing. In liquidity Ratio calculations of availability of cash in short term to repay the short term loans .

* List of liquidity ratios are:

Acid - Test ratio, Cash Ratio, Current Ratio, Net Working Capital, Quick Ratio, Working Capital, Working Capital Ratio

• OPERATING RATIOS- These ratio shows the operating efficiency of company.This information can help management decide whether the company's operating terms are appropriate and whether its operating activities effort are handled in an efficient manner. This ratio represent the relation between operating expenses and cost of goods sold with net sales.

Formula-

OperatingRatio=(OperatingExpenses+CostofGoodsSold​)/Net Sales.

• RISK ANALYSIS RATIO- It is an indicator of a company's financial health. Investor use the ratio to decide whether they want to invest in company.

List of risk analysis ratios are:

The interest coverage ratio, the degree of combined leverage, the debt-to-capital ratio, and the debt-to-equity ratio.

• GROWTH ANALYSIS RATIOS: It's represent the annualized rate of growth of a company's revenues, earnings, dividends . It is also known as profitability ratio.

List of growth analysis ratios:

Gross Profit Margin ,Operating margin, Return on Asset,

Return on Equity , Return on Sales and Return on Investment .