Question

List the three ways that financial ratios should be com-pared or used. Which of the three comparisons do you feel is most important? Why

Answer 1

Financial Ratios help many business runners with a analysis based on the quantitative aspect for their company's financial facts.It can also be used for comparison purposes as owners can compare their financials with other company financials running similar type of business.Let us discuss about the ways to use financial ratios-:

1)Liquidity-These Ratios give the business firms with all the information concerning for competitor's ability to meet short period financial duties and Liquidity ratios also give information how good the company is running short-period economic conditions.This ratio analysis include current and quick ratios.

Current ratio-Present assets divided present liabilities. If it's high it indicate the company can perform good in short period economic conditions.

Quick ratio-It gives information about the how good can competing organization can pay present liabilities without in the need of selling inventory.

2)Financial Leverage-These finds about the company's long-period solvency,this helps business owners to find out how their competitors using their debt and equity financing to manage their operations.

Debt Ratio tells about the information about debt-financing about their competitors using to purchase their business assets.

Debt-to-equity tells how the business are financed through the help of private investors.

3)Profitability-These ratios help to tell about the other competitive companies earn on their company sales and use to compare them with their business and help to tell gross profit margin calculations.This also tells companies to how to reinvest into their business and other analysis.