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What do profitability ratios represent? Give an example of one of them What do liquidity ratios...

  1. What do profitability ratios represent? Give an example of one of them
  2. What do liquidity ratios represent? Give an example of one of them
  3. What do solvency ratios represent? Give an example of one of them
  4. What base amount is used for horizontal analysis of both income statement and balance sheets? Give an example.
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Profitability ratios Profitability ratios compare income statement accounts and categories to show a companys ability to generate profits from its operations. Profitability ratios focus on a companys return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their Example Gross margin ratio is a profitability ratio that compares the gross margin of a business to the net sales. This ratio measures how profitable a company sells its inventory or merchandise. In other words, the gross profit ratio is essentially the percentage markup on merchandise from its cost. This is the pure profit from the sale of inventory that can go to paying operating expenses operations. Liquidity ratios Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they become du s their long-term liabilities as they become current. In other words, these ratios show the cash lev company and the ability to turn other assets into cash to pay off liabilities and other current obligations. Example The current ratio is a liquidity and efficiency ratio that measures a firms ability to pay off its short-term liabiliti with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year Solvency ratio Solvency ratios, also called leverage ratios, measure a companys ability to sustain operations indefinitely by comparing debt levels with equity, assets, and earnings. In other words, solvency ratios identify going concern issues and a firms ability to pay its bills in the long term. Many people confuse solvency ratios with liquidity ratios. Although they both measure the ability of a company to pay off its obligations, solvency ratios focus more on the long-term sustainability of a company instead of the current liability payments. Example The debt to equity ratio is a financial, liquidity ratio that compares a companys total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders) Horizontal analysis Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situations. The statements for two or more periods are used in horizontal analysis. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period. The changes are generally shown both in dollars and percentage Dollar and percentage changes are computed by using the following formulas: 1. Dolar change Amount ofthe item comparison year-Amount ofthe ten in base year Dolar change Amount of the tem in base year 2. Percentage change

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