Question

Explain the uses for each of the three classifications of ratios: liquidity, solvency, and profitability.

Answer 1

Uses of Liquidity ratio
1. Uses of liquidity ratio help to identify the cash flow in the company.
2. It helps to identify the capability of firm to meet its short term liabilities.
3. It focuses on the dependency  of inventory level as part of liquidity .

Uses of Solvency ratio
1. It is important to both creditors and debtors to understand about the long term performance or existence of the company.
2. It checks the ability of company to pay its bond holders and loans .
3. It helps to understand capital structure of company.

Uses of profitabilty ratio

1.  This ratio is highly important for shareholders who want good return on investments and this helps in identifying good profitable stocks.
2. This ratio is highly important for the continued operation of a firm. A firm with low profitability ratios may cease to exist in future.

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