UNDERSTANDING DIFFERENT FINANCIAL RATIOS
A) Profitability Ratios-It shows the final result of business operation. There are two type of profitability ratios they are Profit margins ratio and Rate of return ratios.
1) Profit margin ratio shows the relationship between profit and sales. Under this we have Gross profit margin ratio, Operating profit margin ratio, Net profit margin ratio
a) Gross profit margin ratio- It shows how much profit firm …show more content…
It measures the overall efficiency of production, pricing, administration, selling. 2) Rate of return ratios- It shows the relationship between profit and investment. Under this we have Return on asset, Earning power
a) Return on asset- It shows how much profit firm earned from the asset it owns and it gives an idea of how effective the assets of the firm is. It also gives an idea of firm getting return on investment done.
b) Earning power- It is the measure of business performance ignoring interest charged and the tax paid. It shows whether firm is worthy for investment or not
B) Liquidity Ratio- It is the ability of firm to meet its short term obligation in short run and it shows the relationship between current asset and current liability. It shows the ready cash that firm has. Under this we have Acid-test ratios and Current ratio a) Acid-test ratio- It shows the firms working capital that is tied up in inventory or how much money is locked in inventory b) Current ratio- It shows the firms ability to meet its current ability. It gives an idea of how much current asset is required to cover the current liability that firm …show more content…
Under this we have Debt-equity ratio and Debt to asset ratio a) Debt-equity ratio- It shows the fund provided by creditor versus fund provided by owner equity. b) Debt-asset ratio- It shows to buy an asset how much debt firm has burrowed 2) Coverage ratios shows the relationship between debt and the sources to meet the debt. Under this we have Interest coverage ratio a) Interest coverage ratio- It shows how much interest can be covered by the earning that firm makes. It shows how much profit of the firm have to be declined for interest.
D) Turnover Ratios- It shows the efficiency of the asset that firm owns. It gives the relationship between sales and asset. Under this we have Inventory turnover ratio, Fixed asset turnover ratio, Total asset turnover ratio. a) Inventory turnover ratio- It is the measure of how fast the inventory of the firm is converted into sales b) Fixed asset turnover ratio- It gives measure of sales, productivity and utilization of plant and equipment. c) Total asset turnover ratio- It is measure of utilization of all asset to generate