For a company to come up with a business strategy it first needs to come up with a financial plan. In today’s discussion will we talk about three main financial ratios. “Financial ratio is computing ratios that compare values of key accounts listed on a firm’s financial statements.” (2018. P.149) The three financial ratios are important tools that judge the leverage, profitability, and liquidity.
“Profitability ratios are ratios that measure the rate of return a firm is earning on various measures of investment.” (2018, p. 150) This is important to a business because the whole purpose of a business is to make a profit, profitability shows the business exactly how it is doing and if the business is achieving that goal. “Profitability ratios also have many major ratios one being return-on-equity (ROE), calculated by dividing net income (profit) by owners’ equity, measures the income earned per dollar invested by the stockholders.” This can be important to a stockholder because it can determine the calculations on a large or small amount being given back to a stockholder.
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Common liquidity ratios are the current ratio and the quick ratio. The current ratio is calculated by dividing current assets by current liabilities. This can help a business help pay off debt. "As a quick ratio is a liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash within 90 days or in the short-term."(Folger, 2017). Basically, meaning that a company will have enough quick assets to pay off its