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Question 16 marks a)       How many groups can basic financial ratios be divided into? b) What...

Question 16 marks

a)       How many groups can basic financial ratios be divided into?

b) What are these 5 groups?   

c) Explain what each group measures and give and give an example of one ratio from each group.

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Homework Answers

Answer #1

a]

financial ratios can be divided into 5 groups

b]

These groups are :

  • coverage ratios
  • investment ratios
  • profitability ratios
  • liquidity ratios
  • activity ratios

c]

coverage ratios are measures of security or protection for long-term creditors/investors - examples are debt ratio and interest coverage ratio

investment ratios measure the investment multiples such as PE ratio

profitability measure success/profitability for a given period of time. Example is net profit marigin and ROE

liquidty ratios are measures of ability to pay short-term liabilites. Examples are current ratio and liquid ratio

Activity ratios are measures of how effecively an enterprise is using its asset. Examples are total asset turnover and fixed asset turnover

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