Question

in your own words, what does each measure that current ratio, debt to equity ratio and Return on equity ratio would tell us about your company that is important to investors and creditors?

Answer 1

1. Current ratio is caluculated as current assets/ current liabilities.
2. Debt Equity Ratio = Total outside Debt/ Equity funds
3. Return on Equity = Total return ( Revenue) / Equity funds

Interpretation for one comany:

1. current ratio is tells about the company company liquidity position. current ratio falls below 1 it not good for the company. because the ratio says current laibilities more than current assets i.e. company may not pay their short term debts.
2. debt equity ratio is 2 it is perfect mix of debt and equity of the comany. it varies from industry to industry. falls below the 2 it having more equity funds than debt funds it falls above 2 is debt is more than equity fundsi(i.e mix of debt equiy).falls above 2 it having more interest expenses revenue will be low.more equity funds means risk taken by shareholders is increses.
3. return on equity shows the how much shareholders can earn from their investment noramlly it is greaterthan risk free investment.