Question

Consider the 5 types of financial ratios discussed in chapter 4: Performance, Profitability, Efficiency, Leverage, and Liquidity measures. Identify a person or persons who would be interested in each of these ratios (it does not have to be the same person for all 5), and to what use they would put these ratios.

Answer 1

1) Performance Ratios as, 'These ratios look at how well a company turns its assets into revenue as well as how efficiently a company converts its sales into cash.

Management is interested in performance ratios beacuse it has to answer the stakeholders for the performance of the company and it needs to find the cause .

2) Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholders' equity over time, using data from a specific point in time.

Shareholders are interested in profitability ratios as their investments are at risk and they expect to gain the maximum.

3) An efficiency ratio measures a company's ability to use its assets to generate income

.Efficiency ratios, also known as activity ratios, are used by analysts to measure the performance of a company's short-term or current performance.

4) Leverage or solvency ratios: The solvency ratio is a key metric used to measure an enterprise's ability to meet its debt obligations

Credit rating agencies use solvency ratios to rigorously analyze whether the company will be able to make good its obligations in the long run.

5) Liquidity ratios : Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital.

Debt holders and suppliers are concerned whether they will be paid the amount promised to them at the date that was promised to them. It is for this reason that they are very concerned about the liquidity of the firm