Question

a) Which of the following measures a firms profitability?

b) Which measures market value?

c) which measures liquidity?

Return on equity

Total Assets Turnover

Market-to-book ratio

Inventory Turnover

Current Ratio

Cash Coverage Ratio

Answer 1

Answer:-

Return on Equity:- (Profit available for equity shareholders / Total Equity) * 100

(This ratio tells how much firm earn profit for their equity stakeholders) Hence, we can say that this is measure of profitability of the firm

Total Assets Turnover:- (Turnover / Total Assets)

(This ratio tells per dollar of investment in total assets generate how much turnover) for example:- total assets is 100 and turnover is 500, so per dollar of asset generate 5 dollar of turnover that is 5 times of per dollar of total assets.

Hence, this ratio is never tell about profitability, liquidity and market value of the firm.

Market to book ratio :- (Market value / book value)

(This ratio explianed per rupee of market value of the firm on the one dollar of book value) for example:- book value of microsoft is 100 and market value is 5000. Hence we can say that market view of microsoft is very well

Hence, this ratio explained about market value of the firm.

Inventory Turnover:- (Cost of goods sold / Average Stock)

This ratio explianed how much stock is in the store per rupee of cost of goods sold)

Hence, this ratio is never tell about profitability, liquidity and market value of the firm.

Current Ratio:- (Current Assets - Current Liabilities)

This ratio explianed liquidity of the firm.

Cash Coverage Ratio:- (Cash and Cash Equivalent) / Interest Expense

This ratio calculate to estimate how many times firm can pay its interest liability through its present cash.

So, answer of Part (a):- Return of Equity

So, answer of Part (b):- Market-to-book ratio

So, answer of Part (c):- Current Ratio