Question

Looking at these ratios which four do you think provide the most complete picture of a firm and why? What makes these superior and what industry are you assuming when making this decision?

This can be answered in 250-300 words.

1. Liquidity Ratios

2. Current Ratio

3. Quick Ratio

4. Asset Management Ratio

5. Inventory Turnover Ratio

6. Debt Management Ratio

7. Times Interest Earned Ratio

8. Profitability Ratio

9. Market Value Ratio

10. Market Based Ratio

11. Total Assets Turnover Ratio

12. Liabilities-to-Assets Ratio

13. Industry Average Ratio

14. Fixed Assets Turnover Ratio

This can be answered in 250-300 words.

Answer 1

According to the list of ratios displayed, the first thing I noticed is that, there are some general ratios and others specific ratios (like 2, 3, 5, 7...). So, I think having very specific ratios are useless, unless you have others to get a general context and landscape of a firm.

The four ratios for me that give a complete picture of a firm are: 1 (Liquidity Ratios), 4 (Asset Management Ratio), 6 (Debt Management Ratio), 8 (Profitability Ratio). These are usually, the main categories of financial ratio. Ratios of 1, are used to measure if a firm is able to pay off current debt. 4, measures how effective and efficient a firm is using its assets. Set of ratios related to 6, tell us how much of a company´s operations comes from debt. Ratios of 8 are a class of ratio to asses a business´s ability to generate earning. For that reasons, there ratios are essential for owners or investors of a firm.

I assuming the firm produces or/and sales products, and is a traditional form of firm. Nowadays, firms based of services or online goods like software development, entertainment sector (creating visual content, videogames), online educational teaching and others, are not fit into this kind of classic financial ratios since some, for instance, don’t have inventory, don’t need a huge amount of assets to operate, among others. Also, I discarded ratios related to market (like 9 y 10) because of small and medium firms, these ratios could be not that important.