What is a ratio? How do ratios help alleviate the problem of size differences among firms? What do liquidity, long-term borrowing capacity, and profitability ratios measure? Name a group of users who might be interested in each category, and the reason why.
First of all, I'm glad I saw this posting because I believe strongly in the concept of the ratio. Well, as strongly as one can feel about metrics I suppose. Ratios can be powerful tools and really tell a story about the financial and operational health of an organization. This is because ratios put two related items together in order to put things into perspective. They are especially useful as KPI (Key Performance Indicators) and for Benchmarking.
To put in an non-financial example, let's say someone you just met tells you they live in a house that is 1,800 square feet. You may think that's a decent sized house. But then you find out as the conversation continues that this person is part of a 10 person household. That really changes things. There is a big difference between 4 people vs 10 people living in a ...
What is the significance of the financial ratios of Liquidity, Leverage and Profitability?