Question

What do the following ratios measure?

Liquidity

Activity

Leverage

Profitability

Market

Answer 1

1. Liquidity Ratio: This measures the organisation’s capability to meet its obligation to pay off its short term debt and its long term debt as and when they become due with the assets available with the company and without the need for the organization to raise funds from outside to meet its obligations.
2. Activity Ratios: This measures how efficiently and effectively the business is being carried on by the management in order to use all their assets efficiently to maximize the organisation’s revenue. It throws light on how effectively the organization has managed and used its inventory, accounts receivable and fixed assets .It depicts whether an organization is doing a good job of generating revenue from the organisation’s resources.
3. Leverage Ratios: It reflects on the company’s capital structure and the kind of financing methods used by the company and also its ability to meet its debt obligations. It focuses on the long term solvency of the company and measures the long term stability and structure of the firm.
4. Profitability Ratios: This measures the organisation’s ability to generate income as against all the costs and expenses that it has incurred in order to generate that income. This is a way of measuring how well the company has performed. It reflects on the company’s success in generating that income.
5. Market Ratios: This measures the investors response to the share prices i.e how they feel about owning the shares and the return they will get on the investment .It reflects on how the investors feel about the company as to whether the shares are correctly priced i.e not over or under priced.