Question

Explain how financial ratios are used to conduct financial statement analysis. Provide three example of financial ratios.

Answer 1

Financial ratios are quantitative resources are used to do the financial analysis of statements representing any organisation and they are used to find out various kinds of strength and weaknesses of the organisation by a series of ratios which are categorised under the liquidity ratios,profitability ratios, and solvency ratios and Asset Management ratios so they will be providing a better reflection of position of the company in the market and the ability of the company in order to maximize its advantage in the market.

Three example of the financial ratios would be-

A. Current ratio as it is a type of liquidity ratio which is used to find the ratio of current asset to the current liability and it is used to find how much liquid the company is in order to pay the cash

B. Debt ratio is another ratio which is used to find out the solvency of the company and it will be providing an idea about burden of the company in the long run and solvency capabilities

C. Net profit margin ratio is another ratio which is used to find out the margin of profit and it is used to find out how profitable business is in the current scenario.