L4 FINANCIAL RATIOS

• What is the main purpose of financial ratios?

  To analyze financial statements and assess a company's performance.
• What are the main categories of financial ratios?

  • Liquidity Ratios
  • Leverage Ratios
  • Profitability Ratios
  • Efficiency Ratios
• What is the current ratio also known as?

  Working capital ratio.
• How does the current ratio assess a company's liquidity?

  By comparing current assets to current liabilities.
• If a company has current assets of $200,000 and current liabilities of $100,000, what is its current ratio?

  $2.0$
• What is the quick ratio also known as?

  Acid test ratio.
• Why is the quick ratio considered more conservative than the current ratio?

  Because it excludes inventory and prepayments from current assets.
• How is the quick ratio calculated?

  $QR =$$\frac{CA - I - P}{CL}$
• What does the debt ratio measure?

  The percentage of assets funded by creditors.