4.2 : Types of Ratios

Ratios are essential for assessing a company's operational efficiency, financial stability, and profitability.

1. Liquidity Ratios assess a company's ability to cover its short-term obligations. The Current Ratio is a primary liquidity ratio, calculated as current assets divided by current liabilities, assessing the company's ability to pay its short-term liabilities through its short-term assets.
2. Profitability Ratios measure a company's ability to generate earnings relative to its revenue, assets, equity, and other factors. Return on Assets is a profitability ratio that shows how efficiently a company uses its assets to generate profits.
3. Activity Ratios evaluate how well a company uses its assets and manages its operations. Inventory Turnover is an activity ratio indicating how efficiently inventory is managed, showing the number of times inventory is sold and replaced in a year.
4. Solvency Ratios measure a company's ability to meet its long-term obligations. The debt-equity ratio, a solvency ratio calculated as total liabilities divided by shareholders' equity, provides insights into the debt load relative to equity.

Ratio provides insights into Corporations' financial health, helping investors and management make informed decisions.