Question

Compare and contrast the types (categories) of financial ratios: liquidity ratios, asset management ratios, debt management ratios, profitability ratios, market value ratios. Be sure to discuss how each type of ratio is used and by whom.

Answer 1

There are various kind of ratios which are derived in order to analyse the performance of the company and relate the company's performance to the industry benchmarks so There are different types of ratios which are listed below-

A. Liquidity ratios-liquidity ratios are generally used in order to find liquidity of the company and these ratios are generally used to find the the debt repayment ability of the company and these ratios are also used to determine the ability of the company to pay the cash. This ratio is generally used by lenders who are trying to to get an idea about the repayment capability of the company of their interest obligation.

B. Asset Management ratios- Asset Management ratios are used for determine the ability of the company to manage their Assets and it is used to find the efficiency of the company in order to utilise the assets so that how effective the company is able to utilise their asset in order to maximize the overall sales.

These ratios are generally used by various investors in order to determine the the ability of the company in order to grow by utilising their assets and it is also used by the lenders also.

C. Debt management ratios- These ratios are generally used by companies in order to find out the debt repayment ability and long-term sustainability of the company in order to stay solvent and these are often determined by investors as well as lenders because they will be looking for a company which is having a higher solvency and which is not exposed to insolvency risks.

D. Profitability ratios are those ratios which are used to determine the profit making ability of Companies and these are determined in order to find out the ability of the company to make profits and sustain making profits in the longer so these profitability ratio will be reflecting the ability of the profit making of a company. This ratio will be looked by investors as well as lenders.

E. Market value ratios are those ratios which are related to market price of the company and they are reflected through investors sentiments on the stock exchanges and these ratios will be reflecting the future earnings estimate of the companies and market value ratios are often important for investors to invest into the company.

so these are the type of ratios which are used by various types of stakeholders and they can be used for making a higher rate of return and they can also be used for financing of the company.