Question

Describe the three categories of ratios used in ratio analysis. When working on assessing General Motors, which of these ratios do you think is the most important indicator of successful performance, why?

Answer 1

Major categories of ratios that are used in ratio analysis are -

1. Liquidity ratios - Consists of Current ratio, Quick ratio, cash conversion cycle etc. It tells basically about the liquidity status of the company.

2. Profitability ratio - Return on equity, earning per share, net profit margin,operating profit margin etc. Tells about the profitability of the company.

3. Solvency ratio - Debt to equity, Times interest earned, equity multiplier. This tells about how solvent is the company and whether it can cover for its liabilites or not.

For General motors Profitability ratio is the most important one as it is already a stable company and issues of liquidity and solvency will not arise, so profitability is the only thing that needs to be looked upon for analysis.