Question

Operating Profit Margin

Return on Total Assets

Current Ratio

Working Capital

Long-term debt-to-capital ratio

Price-Earnings Ratio

Which measure do you feel is the most important and why?

Answer 1

Out of all the above ratios, I feel the most important ratio is Working Capital ratio because that determines the fundamental survival of a Company. If the Company fails to retain its operations and income in the short-term, the long-term survival will be furthermore a question mark. The immediate sustenance of the Company is hence the basis or the stepping stone for its long-term existence. Therefore, it is very essential that the concept of Working capital and its ratio analysis is well comprehended. It will determine the health of the Company thereby deeming it whether fit or not in the long-run.

Working capital is needed to run the regular operations of the business. The routine payments and costs, the purchase of raw materials for input to production, etc. are required to run the day-to-day operations. The ratio helps in determining the efficiency of the Company in terms of maintaining financial source to meet its operational needs as well as its liquidity scenario. The Company may be involved in various activities like debt management, inventory management or making the payments to the suppliers. The resultant of all this gives a figure that is considered in Working capital ratio. Therefore, it is because of the measurement of the financial solvency of the business that I feel the Working Capital ratio is very important.