Introduction to Business - Essay Example

Introduction to Business Introduction to Business Ratio analysis is the valuation of a company’s performance and financial condition. It is developed through financial ratios interpretations and calculations settled from the company’s financial statements. Liquidity ratios are the types of ratios used in measuring a company’s ability in meeting its short term debt commitments. They result from dividing liquid assets and cash by the current liabilities and short term borrowings. These ratios show the various times short term debt commitments are covered by liquid and cash assets.

The short term commitments are covered if the value issued is greater than one. The company will be in a worthy financial condition if the liquidity ratios are greater than one (Bragg, 2012). Debt ratios indicate proportions of a firm’s debt to its entire assets. This ratio shows how much the firm counts on debt in financing its assets. It gives users a rapid measure of the debt amounts in the balance sheets of the firm compared to the firm’s assets. Low debt ratios show conservative financing with borrowing opportunities in the future.

Profitability ratios are used in measuring the ability of a firm in generating earnings that are relative to assets, equity and sales. These types of ratios are used in assessing the company’s ability in generating profits, cash flows and earnings relative to the invested money. Additionally, they show how efficiently the firm’s profitability is managed. Activity ratio shows how much a firm has invested in a specific asset, relative to the returns the assets are producing (Bragg, 2012). In conclusion, liquidity ratios are reflected to be the most vital ratios to the financial managers.

The entitys ability in maintaining its short term debt paying abilities is essential for all financial statement users. Profitability ratios are important to the business accountants because they issue valuable information. They access the ability of a business in generating earnings as compared to the firm’s expenses.ReferenceBragg, S. (2012). Business Ratios and Formulas: A Comprehensive Guide. New Jersey: John Wiley & Sons. 2