Question

1. Choose the best measure for each of the three (profitability, liquidity, and solvency - that means one measure for profitability, one measure for liquidity and one for solvency). 2. Give one reason why you chose that measure. 3. Does the measure provide information that is more useful for investors or creditors?

Answer 1

(1).

Best measure for profitability is Return on Equity (ROE)

Best measure for liquidity is Quick Ratio

Best measure for Solvency is Debt to Equity Ratio

(2).

I selected Return on Equity (ROE) because as an investor I would like to see the return on equity. It is true that ROE gives idea about the true profitability that are attributed to shockholders hence ROE is better measurement of profitability.

I selected Quick Ratio because in compare to current ratio quick ratio gives better idea about the liquidity. As we know that there is a difference between current assets and quick assets. Quick assets are true liquid in nature.

I selected Debt to Equity Ratio because solvency measures the relationship between long-term debts and equity hence only debt to equity ratio will assist in measuring true solvency.

(3).

Yes the measures provide information that is more useful for investors or creditors because an investor want to know about actual return given by the company on invested amount so with the help of return on equity investors will get desired information. Creditors will get true information with the help of liquid ratio and debt ratio because these ratios will give true information about liquidity and solvency.