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Liquidity ratios are the ratios that are used to determine the short-term financial position of a business. The liquidity ratios are:
a) Current ratio
b) Quick ratio or Acid Test ratio
c) Cash ratio
Activity ratios are the ratios that are used to determine the efficiency in the utilization of resources by a business. The activity ratios are:
a) Inventory turnover ratio
b) Working capital turnover ratio
c) Receivables turnover ratio
d) Total assets turnover ratio
e) Days Sales Outstanding (DSO)
The solvency ratios are the ratios that are used to determine the long-term financial position of a business. The solvency ratios are:
a) Debt-to-equity ratio
b) Debt to total capitalization ratio
c) Debt to total assets ratio
d) Interest coverage ratio
The profitability ratios are the ratios that are used to determine the profitability of a business. The profitability ratios are:
a) Gross profit margin ratio
b) Net profit margin ratio
c) Return on assets ratio
d) Return on equity ratio
e) Return on capital employed ratio
f) Earning per share ratio
g) Price-earnings ratio
Liquidity ratios
Activity ratios
Solvency ratios
Profitability ratios
Liquidity ratios
Activity ratios
Solvency ratios
Profitability ratios
There are several advantages of using accounting ratios to analyze financial statements. Some of these benefits include:
One of the main benefits of using accounting ratios is that they help in identifying the financial strengths and weaknesses of a company. This is because different ratios measure a company’s financial performance.
For example, the current ratio measures a company’s ability to pay its short-term obligations. On the other hand, the debt-to-equity ratio measures a company's financial leverage.
Another benefit of using accounting ratios is that they help in making comparisons. This is because ratios can be used to compare the financial performance of a company over time.
For instance, a company can use ratios to compare its current ratio for the current year with its current ratio for the previous year. This will help the company to see if its financial position has improved or worsened over time.
Apart from making comparisons over time, ratios can also be used to compare the financial performance of a company with other companies in the same industry.
