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    Financial Ratios

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    I need to identify four financial ratios and state what they tell me about a firm and why it's important to understand what they mean to a bank or an investor. I need to include reasoning.

    I am not discussing overall categories such as Liquidity, Activity, Debt, Profitability and Market Ratios.
    I need to discuss specifics within each category. For example, under Liquidity category, there is current ratio & Quick(acid test) ratio.
    Under debt ratio category there is Times interest earned ratio & fixed payment ratio

    Market ratio category P/E ratio, Market/ Book Ratio.
    Activity Ratio Category: Inventory Turnover. Average Collection Period, average payment period.
    Profitability Ratio category: gross profit margin. operating profit margin & net profit margin.

    I don't need to discuss all the ratios just Four. I am not sure which ones are the most important ones to banks and investors and why. They all seem important to me.
    Perhaps you could give me your expert opinion on which "specific" financial ratios would tell me about the financial health of a firm.

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    Solution Preview

    One of the category of ratios that are most relevant to banks will be the liquidity ratios. Liquidity ratios demonstrate a company's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities. This category will be most relevant to bankers because they would like to know if the company will be able to pay them their interest payments. Within this category, 2 key ratios are:

    1) Current ratio: Current Assets / Current Liabilities?measures the ability of an entity to pay its near-term obligations. "Current" usually is defined as within one year. ...

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