Question

evaluate financial statements using ratio analysis

Answer 1

Ratio analysis are of four types:-

1. Liquidity ratios:-They measures the firm ability to meet current obligations. Liquidity ratios are the measurements used to examine the ability of an organisation to pay off its short term obligations. it is generally used by prospective creditors and lenders whether to extend credit or debt,respectively,to companies.For an investor , A company with high liquidity ratio is preferred as it helps in paying out their debt periodic repayments without much stress on assets as they are able to generate a large amount of cash flows.These ratios can be calculated using Current Ratio, Quick Ratio,Cash Ratios.

2.Levarage ratios:-These ratios show the proportion of debt and equity in financing the firms asset. Levarage ratios are used to measure the companies capital structure,financial obligations,and its ability to clear those obligations.The financial aptitude of the company is measured by the investors,board of directors,creditors and others by using this ratios.A company with high leverage ratio will have more debts and it is likely to have more credit risk associated with it's operations.Leverage is only considered good if the overall return on the capital of the firm is able to exceed the cost of the debt and it is considered as a good sign.These ratios can be calculated using Debt Ratio, Debt to Equity Ratio,Proprietary Ratio, Interest Coverage Ratio

3.Activity ratios:- They affects the firms efficiency in utilizing the assets.Activity ratios provide some indication of the extent to which the assets of the business have been efficiently managed. The activity level of a business may be determined through the sale volume generated by the business. All business use their asset in the pursuit of generating sales revenue. These ratio are used to determine the overall efficiency and effective utilization of resources by business in oder to maximize their overall profits.A company with high effective utilization of resources are always preferred .These ratios can be calculated using Inventory Turnover Ratio, Asset Turnover Ratio,Debtors Turnover Ratios,Working Capital Turnover Ratios etc.

4.Probability ratios:- These ratios measure overall performance and effictiveness of the firm.Probability ratios are used to evaluate the company's ability to generate income. The ratio represents the final result of the company.Investors prefer these profitability ratios on the higher side as they reflect more profits for a firm.These ratios can be calculated using Gross Profit Ratio, Operating Profit Ratio, Net Profit Ratios.

These Ratios helps in determining the direction in which company is heading into it's future and these need to be interpreted in the best possible manner.