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Fully explain the kind of information the following financial ratios provide about a firm: Quick ratio...

  • Fully explain the kind of information the following financial ratios provide about a firm:
  • Quick ratio
  • Cash ratio
  • Capital intensity ratio
  • Times interest earned ratio
  • Return on assets
  • Price-earnings ratio

Solutions

Expert Solution

Solution:-

QUICK RATIO:

The quick ratio, also known as acid test ratio,indicates the company's ability to repay its liabilities without the current inventories.A higher ratio indicates firm's efficiency to meet its short term liabilities.A low quick ratio implies that the company relies more on the inventory or other assets to meet its short term obligatons.

Quick ratio = (Current assets - Inventories) / Current liabilities

CASH RATIO:

It represents the short term liquidity availability of the firm.A short term creditor will be interested in this information.

the formula is as follows

Cash ratio = Cash / Current liabilities

CAPITAL INTENSITY RATIO:

The capital intensity ratio is a financial calculation measuring how much a company is invested in total assets compared to how much it is earning in revenue.What the capital intensity ratio shows is just how much capital it takes a firm to generate a single currency of revenue.

Capital intensity ratio = value of total assets / revenue earned

TIMES INTEREST EARNED RATIO:

It measures the company's ability to pay the interest obligations or say how well the company's earnings cover the interest expenditure.

The formula is as follows:

Times interest earned ratio = EBIT / Interest

RETURN ON ASSETS(ROA):

Every currency of profit earned on asset is measured by ROA.It gives an idea on how the assets are managed or utilized to earn income or how the company is able to convert its investments into profit

The formula is as follows

  Return on assets = Net income / Total assets

PRICE-EARNING RATIO:-

The price-earning ratio is price per share to earning per share.That indicates the price at which investor would invest in share/stocks og a company.Based on earnings of shares/stocks if the ratio is higher that means the company has growth prospectus.

The formula is as follows

Price-earning ratio = Price per share / Earnings per share

jeff jeffy answered 1 year ago
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