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Financial Ratios Analyzing Financial Performance

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What are the different types of financial ratios used to analyze financial performance? Are some ratios more important than others are? Why? Which ratios are important to creditors? Investors? Managers? Why?

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Solution Summary

This response discusses different financial ratios used to analyze financial performance. It also touches upon the importance of ratios to creditors, investors and managers.

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Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. Different type of ratios are:

Working capital
Liquidity ratios measure the ability of a firm to satisfy obligations due in the near future, usually within the next year. The two most popular liquidity or working capital ratios are the current ratio and the acid test (quick) ratio:
- The Current Ratio = Current Liabilities / Current Assets
- Quick (Acid Test) Ratio = Current Assets - Inventories / Current Assets

Profitability ratios
try to measure how profitable the firm is. ...

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