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Financial Ratios Paper

583 Words3 Pages

Financial Ratios Many different financial ratios can be used to evaluate a company's profitability, short-term liquidity, and long-term solvency (Heisinger & Hoyle, 2012). These ratios can provide management with valuable information about the company's financial performance and position and can be used by management to make informed decisions about the company's operations, financial strategy, and future direction. Profitability ratios measure a company's ability to generate profits and return on investment. Some common profitability ratios include the following:
Gross profit margin: This ratio measures the percentage of revenue that remains after subtracting the cost of goods sold. A higher gross profit margin indicates that the company …show more content…

It is calculated by dividing net income by total assets. A higher ROA indicates that the company is generating more profits from its assets (Heisinger & Hoyle, 2012). Short-term liquidity ratios measure a company's ability to meet its short-term obligations, such as paying bills and making payroll. Some common short-term liquidity ratios include:
Current ratio: This ratio measures a company's ability to pay its short-term obligations using its current assets, such as cash, accounts receivable, and inventory. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates that the company has more assets available to cover its short-term obligations (Heisinger & Hoyle, 2012).
Quick ratio: This ratio is similar to the current ratio but excludes inventory from current assets because inventory may not be easily converted to cash in the short term. A higher quick ratio indicates that the company has more liquid assets available to cover its short-term obligations (Heisinger & Hoyle, 2012). Long-term solvency ratios measure a company's ability to meet its long-term financial obligations, such as debt payments and pension liabilities. Some common long-term solvency ratios

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