Question

Please describe the five types of financial ratio analyses. Please provide and briefly discuss 2 ratios from each of the five types of analysis.

Answer 1

We have five broadly categorized financial ratio analysis like Leverage, Liquidity, Profitability, Efficiency and Market Value ratios. Liquidity Ratio gives us information over how much current liabilities are being paid off by the company each year and how effectively current assets are put to use. We use current ratio to get to know about company's ability to pay off short term liabilities. Also comes Operating cash flow to determine the how much can a company tolerate a loss and also a way to get to know how much is a company able to produce in an year. Market value ratios consider calculating shareholders value with respect to the dividend they offer, earnings and market price. Earning share per Price is a ratio where analysts consider calculating for the purpose of knowing how much income is being generated each share. PE ratio is Price Earnings ratio which is used in comparitive analysis among industries and companies. Profitability Ratio determines how much is a company able to produce using it's assets and equity. Return on Assets calculates how much returns are the assets are able to produce the cash flows, also Return on Equity calculates how much returns can be generated as a profit or gain to the shareholders. Efficiency ratios discuss over how capable are the assets in producing the returns or gains. Inventory Turnover Ratio discusses on how much the last time inventory has been sold off. Accounts Receivable ratio is useful in getting to know how much credit given to the customers need to be gained.