Liquidity Ratio
Liquidity ratio is used to calculate the capacity of a firm if it can meet the maturing financial obligations. It focuses on short-term solvency as if the firm were close down today at book value. The most usual liquidity calculates the Current Ratio (CR), and it shows a sign of a firm’s capability to pay short-term assert with short term benefits. The current ratio is defined as:
CR=CA/CL
Where CR is the current ratio, CA is existing benefits, and CL is existing liabilities. If CR>1, it means that the CA that will be liquidated that year is enough to shield the CL that will be due to that period.
Leverage Ratio
The leverage ratio is used to measure the number of funds that are given by equity as well as holders of debt. This ratio centre’s on the permanent solvency of the firm. The higher the quantity of due funding comparative to equity financing, the more advantaged the firm is, as well as the higher the risk its holders face. If leverage is high, then it is associated with a high expectation of returns.
Repayment Capacity
The repayment capacity ratio is used to inspect the account of the firm in terms of flows. The focus of this ratio is to calculate the range to which the income of the firm is capable of satisfying the duty of the firmly fixed payment. Times interest earned calculate the degree to which the income of the firm can decrease prior to the firm cannot make its interest payments.
Efficiency Ratio
The efficiency ratio is also called the asset management ratio, its focus on measuring the efficiency of how the firm is managing its benefits. The directory turnover proportion calculates how skilfully the firm governs its directory and is explained as:
ITO= sales/INV or COGS/ INV
The ITO is the directory turnover proportion, the COGS sort of the price is common a better calculate than sales because the directory is carried at cost on the balance sheet as well offers a superior quality of the increasing quantity of stock traded during the time; however, industry statistics are sometimes announced at market cost, as well as we would need to use the market cost rate of the ITO proportion to make a well-grounded comparison. It is also superior to use some means calculated for directory over the sales period to avoid feasible strains with seasonal effects.