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The stakeholders of a company (Shareholders, Creditors, Management, etc.) wants to know the financial health of the company for different reasons. Ratio analysis is the toll used by all of these in various different ways. There are different types of ratios which serves the purpose of checking the financial health of the company for the stakeholders. It is one of the widely used tools of financial analysis.
The below mentioned types of ratios gives the overview of what aspect of the performance it measures and to whom it is useful:
Profitability Ratios: To measure the profitability of a company, these ratios are used by all the stakeholders. Net profit margin and Gross profit margin are the examples of profitability ratios.
Long Term Liquidity: To measure the long term sustainability of the company, these ratios are used by the long term investors and management of the company. Debt-Equity ratio and Debt-Assets ratio are the examples of long term liquidity ratios.
Short Term Liquidity Ratios: To measure the short term liquidity of a company, these ratios are used by creditors and management of the company. Current Ratio, Quick Ratio (Acid-test Ratio) and Cash Ratio are the examples of short term liquidity ratios.
Management Efficiency Ratios: To measure the efficiency of the management, these ratios are used by all the stakeholders. Inventory turnover, Receivables turnover and Payables turnover are the examples of management efficiency ratios.
Return on Investment Ratios: To measure the return on investment of a company, these ratios are used by the investors of the company. Return on Equity (ROE), Return on Assets (ROA) and Return on Capital Employed (ROCE) are the examples of return on investment ratios.
Market Ratios: To analyze and forecast the market price of a company, these ratios are used by all the stakeholders. P/E Ratio, Dividend Yield, Payout Ratio and Price to Book Value Ratio are the examples of Market Ratios.
Ratio analysis is widely used and one of the basic tool for analyzing the performance of a company. However, it is only useful when combined with other tools or comparison of ratios with the competitors of a company. Contact us at the finance assignment help site to for the best finance academic assistance available online.
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