ZZ Tire Company has grown a lot and has noticed that they are starting to take...

ZZ Tire Company has grown a lot and has noticed that they are starting to take on a lot of debt in opening new retail installation locations. You are brought in as a consultant to analyze their financial situation. Look through the four types of financial ratios (liquidity, leverage, profitability, and market measure ratios). Briefly describe each type of ratio. Then figure out which type of financial ratios you would use to look at ZZ Tires debt issues.

Expert Solution

Liquidity ratios are the current ratio and the quick ratio.

These ratios determine the liquidity position of the company. If the current ratio is more than 2, and the equick ratio is more than 1, then the company is considered to be liquid, that is it can easily convert it's current assets into cah to pay the current liabilities. The quick ratio uses the most liquid assets and eliminates inventory while calculating the ratio.

Profitability ratio :

Net profit margin, gross profit margin .

These ratios measures the amount of profits generated in the business. The higher the ratio, the better is the profitability.

Leverage ratios :

Debt/ equity ratio : this ratio measures how mcuh of the company's assets is financed by debt. The lower the leverage ratio, the less is the risk of bankrutcy for the firm. A company shpudl only rasie enoigh debt as to take benfits of the interest tax shield.

The market measure ratio meausures the market value of a stock in comparison to the certain accounting values. Thsi helsp to analyize the risk and return. These ratio helps to determine weather a stock si overvalued, undervalued or correctly priced. It helps to make investment decisiosn , weather to invest in a stock or not.

We should look at the leevrage ratios to look at the ZZ tire company's debt issues.

jeff jeffy answered 1 year ago

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