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How financial analysts classify the ratios used during an analysis of a company's financial statements. What...

How financial analysts classify the ratios used during an analysis of a company's financial statements. What does each type of ratio tell us and provide a single example of each and why it is classified in that manner.

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Expert Solution

Classification of Ratios:
01.Liquidity Ratios
Liquidity ratio measures the firm’s ability to pay its short-term liabilities. Inability of firm to pay off its short-term obligations affects its credit rating. Lack of sufficient liquidity as well as excess liquidity is bad for the entity.
eg.Current Ratio
02.Solvency Ratios
Solvency ratio measures the long-term stability as well as structure of the firm. This ratio provide assurance to the lenders regarding the payment of interest due periodically as well as the repayment of the principal amount on maturity of the debt. This includes both capital structure ratios as well as coverage ratios.
eg.Debt Service Coverage Ratio
03.Turnover Ratios
Turnover ratios evaluate the efficiency with which the firm utilizes its assets. These ratios are also called asset management ratios.
eg:Debtors Turnover Ratio
04.Profitability Ratios
This ratio measures the operational efficiency of the firm. Organizations tend to maximize these ratios to maximize the value of the firm. These ratios show the end results of the business operations.
eg:Gross Profit Ratio
05.Earning Ratios
This includes the profit earning ratio as well as the earnings per share. These ratios help potential investors as well as owners of the firm regarding the future prospect of the firm as well as the return expected from the firm in the future.
eg:Price Earning Ratio

ekkarill92 answered 1 year ago
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