Financial Ratios

This article discusses the different types of financial ratios that can be used to analyze a company’s financial health. The ratios are categorized based on their purpose and the users who are interested in them.

Questions

• What are the different types of financial ratios?
• What are the purposes of financial ratios?
• Who are the different users of financial ratios?

Answers

• There are five types of financial ratios: liquidity ratios, activity ratios, profitability ratios, coverage ratios, and market value ratios.
• Liquidity ratios measure a company’s ability to meet its short-term obligations.
• Activity ratios measure how efficiently a company is using its assets.
• Profitability ratios measure a company’s ability to generate profits.
• Coverage ratios measure a company’s ability to meet its debt obligations.
• Market value ratios measure the value of a company’s stock relative to its financial performance.
• The different users of financial ratios include shareholders, short-term creditors, management, and long-term creditors.