Question

1. List and define TWO ratios generally used by investors and creditors to measure a company's ability to pay current liabilities.
2. List and define TWO ratios generally used by investors and creditors to measure a company's ability to sell inventory and collect receivables.
3. List and define TWO ratios generally used by investors and creditors to measure a company's ability to pay long-term debt.
4. List and define TWO ratios generally used by investors and creditors to measure a company's profitability.
5. List and define TWO ratios generally used by investors and creditors to analyze stock as an investment.

Answer 1

a ) Two Ratios that measure a company's ability to pay current liabilities :

1. Current Ratio :

• Current ratio is a liquidity ratio that measures a company's ability to cover its current liabilities with its current assets
• Current ratio = Current asset / Current liabilities
• Higher the Current Ratio, higher will the Liquidity of Company

2. Quick Ratio :

• Quick ratio is also used to measure company's liquidity . but here, only quick assets are measured to cover company's short term liabilities.
• Quick ratio = Liquid Current Assets / Current Liabilities .
• Higher the quick Ratio, higher will the Liquidity of Company

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b ) Two Ratios that measure company's ability to sell inventory and collect receivables :

1. inventory turnover ratio:

• Inventory turnover ratio shows how many times a company has sold and replaced the inventory during a given period .
• Inventory turnover ratio = Total sales / Average inventory

2. Debtor Turnover ratio :

• Debtor Turnover ratio measures how frequently account receivables are collected during a given period.
• Debtors turnover ratio = Total sales / Average Account receivables

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c ) Two Ratios that measure a company's ability to pay long-term debt.

1. long term debt to equity ratio:

• Long term debt to equity ratio shows how much long term debt obligation is there in comparison to company's equity.
• higher the ratio. Greater is the leverage and risk factor .
• Long term Debt to equity ratio = Total Long term Debt / total equity capital

2. long term debt to total assets ratio :

• Long term debt to Total assets ratio shows how much long term debt is in company in comparison to total assets .
• higher the ratio. Greater is the leverage and risk factor .
• Long term Debt to total assets ratio = Total Long term Debt / total assets.

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d ) Two Ratios that measure a company's profitability :

1. Return on Assets ratio :

• Return on Assets ratio measures a company's ability to generate profits from its assets .
• Return on Assets ratio = Net Income / Average total Assets.

2. Return on Equity ratio :

• Return on Equity ratio indicates a company's financial performance by measuring how efficiently a company is generating income from its equity investment of its owners.
• Return on Equity ratio = Net Income / Shareholder's Equity.

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e ) Two Ratios that are used by investors to analyse stock of company :

1. Price to earning ratio :

• Price to earning ratio helps the investor to determine the market value of stock as compared to company's earnings.
• Price to earning ratio = Market price of share / Earnings per share

2. dividend payout ratio :

• Dividend payout ratio is the measure of dividends paid out to shareholders relative to company's net income.
• Dividend payout ratio = Dividend per share / Earnings per share.

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