Question

How do Finance Majors use ratio analysis?

Answer 1

Ratio analysis is used in a number of ways by finance professionals. There are various types of ratios such as profitability ratios, liquidity ratios and capital structure ratios. Profitability ratios such as net profit ratio, gross profit ratio and operating profit ratios are used for analyzing the profitability of the business. These ratios are also used for comparing different companies in the same industry which enables the users of finance to make relevant decisions. Liquidity ratios such as quick and current ratios enable the user to determine their liquidity position of the business and understand their level of immediate solvency. Capital structure ratios allow the users to assess the long-term solvency of a company by understanding the proportions of debt and equity. There are various efficiency ratios such as inventory turnover, asset turnover and receivables turnover ratios which allow professionals to assess and compare the efficiency of management.