Purpose and Types of Ratios
Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt ratios measure the firm's ability to repay long-term debt. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.
Financial ratios allow for comparisons
- between companies
- between industries
- between different time periods for one company
- between a single company and its industry average
Ratios generally are not useful unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition are usually hard to compare.
Read more about this topic: Financial Ratios
Famous quotes containing the words purpose and, purpose, types and/or ratios:
“I think the worst thing this nation could do for humanity would be to leave any uncertainty as to our will, our purpose and our capacity to carry out our purpose.”
—Hubert H. Humphrey (1911–1978)
“Art for art’s sake, with no purpose, for any purpose perverts art. But art achieves a purpose which is not its own.”
—Benjamin Constant (1767–1834)
“As for types like my own, obscurely motivated by the conviction that our existence was worthless if we didn’t make a turning point of it, we were assigned to the humanities, to poetry, philosophy, painting—the nursery games of humankind, which had to be left behind when the age of science began. The humanities would be called upon to choose a wallpaper for the crypt, as the end drew near.”
—Saul Bellow (b. 1915)
“Typography is not only a technology but is in itself a natural resource or staple, like cotton or timber or radio; and, like any staple, it shapes not only private sense ratios but also patterns of communal interdependence.”
—Marshall McLuhan (1911–1980)