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Financial ratios, Du Pont system

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1. What are the four categories of financial ratios? Choose one category (excluding liquidity ratios) and list and describe the various ratios in that category. What do the calculated numbers mean for these ratios?

2. What is the Du Pont system, and why is it better than the traditional ROE model?

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The solution discusses Financial ratios and Du Pont system.

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1) What are the four categories of financial ratios? Choose one category (excluding liquidity ratios) and list and describe the various ratios in that category. What do the calculated numbers mean for these ratios?

The four categories of financial ratios are:
1. Liquidity ratios: Can we make required payments as they fall due?
2. Asset management ratios (Activity ratios): Do we have the right amount of assets for the level of sales?
3. Debt management ratios: Do we have the right mix of debt and equity?
4. Profitability ratios: Do sales prices exceed unit costs, and are sales high enough as reflected in PM (Profit Margin), ROE (Return on Equity) and ROA (ROA)?

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 ...

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