Reference no: EM133594504
Question: Financial ratios are metrics that use financial data to measure a company's liquidity, leverage, growth, margins, profitability, rates of return, and valuation (Team, n.d.).
The purpose of financial ratio analysis is to assess a company's financial health and performance. This is done by comparing different financial metrics to a company's financial statements. Financial ratios can be used to measure a company's liquidity, leverage, profitability, efficiency, and valuation (Bloomenthal, 2023).
Liquidity Ratios: Liquidity ratios assess a company's ability to meet its immediate financial obligations using its liquid assets. Common liquidity ratios include the current ratio, quick ratio, and working capital ratio (Bloomenthal, 2023).
Leverage Ratios: Leverage ratios measure how much debt a company has relative to its assets, equity, and earnings. This information can be used to assess a company's ability to meet its debt obligations and stay afloat over the long term. Common leverage ratios include the debt-to-equity ratio, debt-to-assets ratio, and interest coverage ratio (Bloomenthal, 2023).
Activity Ratios: Activity ratios quantify how productively a company deploys its assets and liabilities to generate revenue and enhance profitability. Key ratios that measure this productivity include turnover ratio, inventory turnover, and days' sales in inventory (Bloomenthal, 2023).
Profitability Ratios: Profitability ratios assess how efficiently companies use their resources to generate profits (Bloomenthal, 2023).
Growth Ratio: A growth ratio is a financial ratio that measures the rate of change in a company's or industry's performance over a period. Growth ratios are typically expressed as percentages, and they can be used to compare the growth of different companies or industries, or to track the growth of a company over time (Chen, 2023).
The most important financial ratios for a company in making strategic decisions are the ones that are most relevant to the company's specific industry, business model, and the ones that will help the company achieve its specific goals.