Question

What are the three categories of ratios that can be used to analyse a business? 30–50 words. What types of ratios are used to analyse the ability of an entity to continue operations in the long term? 30–50 words

Answer 1

What are the three categories of ratios that can be used to analyse a business

Main three categories of ratio include Profitability, leverage and Liquidity ratio. Top few ratio to used in the financial field include:

Debt to Equity ratio – This ratio is a quantification of a firms financial leverage estimated by dividing the total liabilities by equity .

The Liquidity is the ability of a firm to pay its short term obligation for the continuous operation. The Liquidity is not only measured by the cash balance but also by all kind of assets which can be converted into cash with short term period and without losing value .

The profitability measures the economic success of the firm irrespective cash flow in the firm.

The Liquidity of the firm is measured by current ratio and net wroking capital ratio where as profitability is measured by return on asset and return on equity.

The current ratio is considered acceptable if current assets to current liabilities equal to 1. The current asset of a firm should be at least at the level which covers the current Liability with some extra margin of safety of current assets

What types of ratios are used to analyse the ability of an entity to continue operations in the long term

Solvency ratio- called leverage ratio – measures a company ability to sustain operation indefinitely by comparing debt level with Equity , earnings and assets

Solvency ratio identify going concern issues and a firms ability to pay obligation in long term

Solvency ratio , Liquidity ratio both are important for companies long term purpose

Certain activity Ratio represents company’s cash flow position, cycle , providing picture about how effectively and efficiently assets are being used . Company has to find out- “ How long company takes to collect receivables, take to sell Inventory and pay suppliers etc.