Question

2) What ratios assist in determining a company’s liquidity, solvency and profitability? As a potential investor, which ratios would you select to review the company and why?

Answer 1

FOR DETERMINING COMPANY LIQUIDITY FOLLOWING RATIO BECOMES HELPFUL:

CURRENT RATIO

QUICK ASSET RATIO OR ACID TEST RATIO

FOR SOLVENCY PURPOSE:

CURRENT RATIO

QUICK ASSET RATIO

INTEREST COVEREAGE RATIO

DEBT EQUITY RATIO

FIXED ASSETS TO NETWORTH RATIO

FOR PROFITABILITY :

GROSS PROFIT RATIO

NET PROFIT RATIO

RETURN ON INVESTMENT

RETURN ON EQUITY.

BEING THE INVESTOR IN EQUITY SHARES OF THE COMPANY, I WILL BE INTERESTED IN KNOWING THE PROFITABILITY AND SOLVENCY OF THE COMPANY

FOR SOLVENCY, DEBT EQUITY RATIO WILL BE HELPFUL MORE AND FOR PROFITABILITY, RETURN ON EQUITY IS RELEVANT FOR ME.

IF I AM INVESTING FINANCE BY WAY OF PROVIDING DEBT THEN,

INTEREST COVERAGE RATIO SHALL BE CONSIDERED.