Question

1. Activity ratios 2. Leverage ratios 3. Profit ratios and liquidity ratios

What are these terms purpose and how is it used to determine strengths and weaknesses in a company?

Answer 1

Activity ratios are tools used in financial analysis to measure the business' ability to convert its assets into cash.These ratios are used to measure the efficiency of the business. various activity ratios are inventory turnover ratio, assets turnover ratio etc. Higher the ratio better the performance and efficiency of the company.

Leverage ratio- A leverage ratio is a financial ratio that indicates the level of debt into a company's capital structure. it measures how company is leveraged and what is the degree of leverage or debt in capital structure. it is measure of risk into busieness. various kind of leverage ratios are debt ratio, equity ratio, equity multiplier etc. Lower the degree of leverage, less risky would be the company

Profitability ratio- These ratio measures the profitability of the company during a given period. it establishes the relationship between net income and sales of the company. various profitability ratios are gross profit ratio operating profit ratio and net profit ratio. Higher the degree of ratio better the performance of the company.

Liquidity ratio- It measures the short term debt paying position of the company. these are also known as working capital ratios and used to measure short term solvency. various liquidity ratios are current ratio, quick ratio, cash ratio etc. A ideal current ratio is 2:1 and quick ratio is 1:1 which is considered as ideal situation.