Accounting Case - Different Ratios

The financial ratios are important to measure the financial performance of a company and to compare the firm's position with its other competitors in same industry. The ratios can also predict the future insolvency of a company. These ratios are useful for different types of accounting information users such as, creditors, management of company, bankers, suppliers, customers, shareholders and general public as well. There are five major types of ratios such as, profitability ratios, liquidity ratios, solvency ratios, assets turnover ratios and market ratios.

The Profitability ratios are the Return on capital employed, net profit margin and gross profit margin. These ratios indicate the company's efficiency in its operations. These ratios measures how well the firm is performing in terms of profit (Atrill and Mclaney 2005).

The Liquidity ratios tell us about the liquidity position of the company and how well the company in meeting its short term is loans, payments, and other payments to creditors. Current ratio and quick ratio are two main ratios which measures the company's ability to meet with the debts in short period. We can compute the current ratio by dividing the total current assets by current liabilities and it shows that how much company is liquid.

The Assets turnover ratios such as, assets turnover ratio, receivables turnover, average collection period, and inventory turnover ratio are some ratios which help to measure the firm's ability to use its assets in a way so it can generate more income from it.

The Solvency ratios are the financial leverage ratios which show the power and capacity of a firm to survive over a longer time. Creditors and stockholders are concerned about these ratios to look at the power of the company to pay back of their interests and repayment of loans. Debt ratio and Times interest earned ratio is the ratio that can tell about the company's ability to pay debts from the amount