4.3 Using Financial Ratios
Financial ratios provide a second method for standardizing the financial information in the income statement and balance sheet. Ratios can help us answer the following questions about the firm’s financial health:
| Question | Category of Ratios Used to Address the Question |
|---|---|
| 1. How liquid is the firm? Will it be able to pay its bills as they come due? | Liquidity ratios |
| 2. How has the firm financed the purchase of its assets? | Capital structure ratios |
| 3. How efficient has the firm’s management been in utilizing its assets to generate sales? | Asset management efficiency ratios |
| 4. Has the firm earned adequate returns on its investments? | Profitability ratios |
| 5. Are the firm’s managers creating value for shareholders? ... |
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