Question

How do managers use Key Financial ratios to determine business operations. Discuss the various ratios and which do you think is most important to determine the health of a business.

Answer 1

Financial Ratios- These are the numbers that represent company's performance, health and overall position. These are the useful indicators. Financial ratios are calculated to know the trend of the company and to compare the other companies in the same industry.

Types of Financial Ratios:

Liquidity Ratio- These ratios tell the liquidity position of the company. If ratio is higher, it is good.

Kinds:

• Current Ratio
• Quick Ratio
• Cash Ratio

Profitability ratio- These ratios tell the profitability position of company, how much company is earning over its sales.

Kinds:

• Operating profit margin
• Net profit margin
• Return on equity
• Return on Assets

Activity Ratios: These ratios tell the efficiency of total assets to generate sales.

Kinds:

• Total Asset turnover
• Inventory turnover
• Account receivables turnover

Leverage Ratios: These ratios tell the relationship between debt and its total assets and shareholder's equity.

Kinds:

• Debt Ratio
• Debt equity Ratio
• Debt to Asset Ratio
• Times Interest earned Ratio