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Financial Ratios - Profitability, Liquidity, Debt, Market

Describe these four ratios:

1. Profitability ratios

2. Liquidity ratios

3. Debt ratios

4. Market Value ratios

Financial ratios are important to the understanding of the financial health of a company. You and your colleagues work for a financial services firm. You are discussing the merits of the various financial ratios. Identify these four financial ratios and state what they tell you about a firm and why it's important to understand what these ratios mean to both a bank and an investor. Describe in a 2-3 paragraphs.

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1. Profitability ratios

Profitability is the ability of a business to earn profit over a period of time. A company should earn profits to survive and grow over a long period of time. Profitability is a result of a larger number of policies and decisions. The profitability ratios show the combined effects of liquidity, asset management (activity) and debt management (gearing) on operating results. The overall measure of success of a business is the profitability which results from the effective use of its resources.
The profitability ratios include: operating profit margin, net profit margin, return on assets and return on equity.
Profit margin measures how much a company earns relative to its sales. A company with a higher profit margin than its competitor is more efficient. There are two profit margin ratios: operating profit margin and net profit ...

Solution Summary

The solution describes four financial ratios - profitability ratios, liquidity ratios, debt ratios, and market value ratios in about 678 words with references.