Overview of Common Ratios Used including Categories

As an analyst you were probably bewildered at first by the number of ratios that appear in published information. You need a way to get them organized in your mind to be able to do your job. Sorting them into broad __categories__ would be a good way to start.

These categories are widely used: __Activity ratios__ measure how well a business does its day-to-day things. __Profitability ratios__ measure how well a business uses the assets it has to make profits. __Liquidity ratios__ measure how well a business can meet its short-term debts. __Solvency ratios__ measure how well a business can meet its longer-term debts. __Valuation ratios__ measure things that relate to what a company is worth. Stockholders are interested in this one. If you are an analyst for a consulting firm that specializes in efficient operations, which of these categories would you want to use to find useful ratios before visiting a business?

Good place to start! Activity ratios examine how well a business handles its day-to-day tasks like managing inventory.

No, that's not the right answer. Liquidity ratios deal with the ability to pay debts coming due in a year or less.

Two of the categories can give you useful information about a firm's ability to meet its obligations. They are the liquidity ratios, which cover the ability to pay short-term obligations, and solvency ratios, which cover debts coming due in longer-term periods. If you were interested in purchasing a firm's 30-year bonds, which category of ratios would be useful to you?

That's right! They would be the best ratios for you to look at since they analyze repayment of long-term debt.

Not correct. These would be more useful for buyers of short-term bonds maturing in one year or less.

Incorrect. Efficiency in generating profits is not the most important category for a long-term debt purchase.

After you're satisfied that it will be easier to find groups of useful ratios, you just need to remember why you are doing the analysis to find the right category. For example, stockholders are interested in the valuation ratios of the company since that is a factor in the share price. Potential stockholders look at the profitability ratios as well. Also, remember that different information sources may classify them in different ways. Some ratios may also be useful in more than one category. For example, an activity ratio that measures how quickly a company collects accounts receivable can be useful in determining liquidity as well.

Not really. These would be of interest to potential investors in stock since they deal with the valuation of the company.

To summarize: [[summary]]

Activity ratios

Liquidity ratios

Valuation ratios

Activity ratios.

Liquidity ratios

Solvency ratios.

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