Question

Describe the five groups of ratio measurements. Be sure to include what each measures and why the ratios are important in assessing the financial health of a business.

Answer 1

A)Liquidity or Solvency Ratios - It measures the firm's ability to pay .short-term loans/debt obligations. these ratios involve the current assets and current liabilities example is the quick. ratio (Quick ratio = (current assets – inventories) / current liabilities) describes how much. money is available. to pay nearest liabilities

B)Financial Leverage or Debt Ratios - these ratios .measure the firm's ability to pay long-term debt and liabilities It uses firms long-term liabilities in the ratios. they tell .us about different aspects of companies financial health.

C)Market Value Ratios - Are only calculated for public. trading companies as use stock price. an example is a price to earnings ratio which helps investors to determine .the expected rate of returns of the company to decide whether to invest of not.

D)Profitability Ratios - these .ratios measure how efficiently the .firm uses its assets and how effectively it manages its operations. They focus on the firm's ability to .generate a profit. and an adequate return on assets and equity.

E)Asset Efficiency or Turnover Ratios - these ratios measure .the efficiency with. which the firm uses its assets to produce sales.they are useful in determining the business from. a dynamic .viewpoint.

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