How Do We Use Ratios to Analyze a Business

•Different ratios explain different aspects of a company.
•Ratios are used for the following purposes:
- Evaluating the ability to pay current liabilities and long-term debt
- Evaluating the ability sell merchandise inventory and collect receivables.
- Evaluating profitability
- Evaluating stock as an investment

How Do We Use Ratios to Analyze a Business





Evaluating the Ability to Pay Current Liabilities

•Working capital measures the ability to meet short term obligations with current assets. Working capital is defined as follows:



Current Ratio

•The most widely used ratio is the current ratio. This ratio measures a company’s ability to pay its current liabilities with its current assets.



Cash Ratio

•The cash ratio helps determine a company’s ability to meet its short-term obligations.



Acid-Test (or Quick) Ratio

•The acid-test ratio (sometimes called the quick ratio) tells us whether a company can pay all its current liabilities if they come due immediately.




Last modified: Tuesday, August 14, 2018, 8:39 AM