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*Essay questions* Discuss the various categories of financial ratios used in financial statement analysis. Provide at...

*Essay questions*

Discuss the various categories of financial ratios used in financial statement analysis. Provide at least two examples of each type of ratio and discuss what the particular ratio tells us about the performance of a company.

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Answer #1

There are mainly 4 categories of financial ratios

1. Liquidity Ratio - They Measure firms ability to meet current obligations

eg: Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Current Assets - Inventory / Current Liabilities

2. Solvency Ratio - These Ratios shows the proportion of debt and equity in financing the firms assets

eg: Debt Equity Ratio = Debt / Equity

Financial Leverage = Total Asset / Total Equity

3. Activity Ratio - These reflect firms efficiency in utilising assets.

Inventory Turnover Ratio = Cost of goods sold / Average Inventory

Fixed Assets Turnover Ratio = Sales / Average Fixed Assets

4. Profitability Ratios - Overall performance and efffectiveness of the firm

Eg : Net Profit Margin = Net Profit / Sales

Return on Equity = Net Profit / Equity

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