Question

Please list three different financial ratios and explain how they are calculated.

What is the importance of those ratios?

Answer 1

Ans - Three are three financial ratios

1.) Current Ratio - current ratio is a comparison of current assets and current liabilities . This ratio is very useful for potential creditors so as to analyse the short term position of the company

Current ratio = Current assets / Current liabilities

Current assets - current investment , cash , trade receivables , prepaid expenses etc

Current liabilities - Short term liabilities , include short term borrowings etc

Importance -

I) It is measure of degree to which current assets cover current liabilities

II) It is measure of safety margin available

III) High current ratio implies high investment in current assets which is not sign

2. Liquid ratio - this ratio is used to asses short term liquidity . The relationship of liquid assets to current liabilities is known as liquid ratio

Liquid ratio - Liquid assets / Current liabilities

Liquid assets - current assets - (stock + prepaid expenses)

Importance -

It is measure of capicity of business to meet its short term obligations without any flaw  

3. Debt equity ratio - This ratio helps to ascertain the soundness of long term financial position of company , it indicates the proprotion between total long term debt and shareholders funds

Debt equity ratio - Long term debt/ Equity holder funds

Debt - long term debts

Equity fund - share capital + reserves

Importance -

It measures the degree of indebtness of an enterprise and gives an idea to long term lender regarding extent of security of debt .