Question

• What are the four main categories of financial ratios?

Answer 1

The four major categories of financial ratios are:
1) Profitability
Example of profitability ratios are:
Return on assets: Net Income/Total Assets
Return on investment 1: Net Income/Owners' Equity
Net profitability: Net Income/Net Sales
Gross profitability: Gross Profits/Net Sales
Earnings per share: Net Income/Number of Shares Outstanding
Investment turnover: Net Sales/Total Assets

2) Liquidity
Example of liquidity ratios are:
Current ratio: Current Assets/Current Liabilities
Quick ratio: Quick Assets (that can be cash, marketable securities, and receivables)/Current Liabilities
Cash to total assets: Cash/Total Assets
Sales to receivables (or turnover ratio): Net Sales/Accounts Receivable
Cash turnover: Net Sales/Net Working Capital

3) Leverage
Example of leverage ratios are:
Debt to equity ratio: Debt/Owners' Equity
Debt ratio: Debt/Total Assets
Interest coverage: Earnings before Interest and Taxes/Interest Expense

4) Operating
Example of operating ratios are:
Annual inventory turnover: Cost of Goods Sold for the Year/Average Inventory
Accounts receivable turnover Net (credit) Sales/Average Accounts Receivable
Inventory holding period: 365/Annual Inventory Turnover