Describe each type of ratio category: liquidity, solvency, and profitability. Also, choose one ratio from each category and provide an example and describe what each is useful for.
TYPES OF RATIOS
Liquidity Ratios: Liquidity relates to the ability of a company's to meet its short-term debts (current liabilities) as and when due. The major focus, in liquidity analysis, is to ascertain the relationship between the current assets and current liabilities.
An example of a ratio under this category is the Current Ratio. This is the most commonly used ratio and measures the extent of coverage that a company's current assets give over the current liabilities. There is no fixed number for this ratio; ...
The solution gives explanations and examples for the different categories of ratios.
The following ratios are described:
- Liquidity ratios.
- Profitability ratios.
Examples are given for each category.