Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 13 - Financial Analysis: The Big Picture - Questions - Page 727: 12


a) Liquidity Ratios b) Solvency Ratios C) Profitability Ratios

Work Step by Step

a) Liquidity ratios measure the short term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. It also measures the company's short term debt paying ability and calculated with Current ratio, Current cash debt coverage ratio and Receivables turnover ratio. b) Solvency ratios measure the ability of the enterprise to survive over a long period of time. Long term creditors are interested to know the company's paying capacity of periodical interest dues & loan amount on maturity. c) Profitability ratios measure the income or operating expenses of the enterprise for a given period of time. A company's income / loss, affects its ability to obtain debt and equity financing, its liquidity position and its ability to grow. The profitability ratios used are Gross Profit ratio, Net profit ratio, Expense ratios, return on assets ratio, Profit margin ratio, Assets turnover ratio etc.
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