Financial Ratios [LO2] Fully explain the kind of information the following financial ratios provide about a firm:
- Quick ratio
- Cash ratio
- Total asset turnover
- Equity Multiplier
- Long-term debt ratio
- Times interest earned ratio.
- Profit margin
- Return on assets.
- Return on equity
- Price–earnings ratio
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- Quick ratio provides a measure of the short-term liquidity of the firm, after removing the effects of inventory, generally the least liquid of the firm’s current assets.
- Cash ratio represents the ability of the firm to completely pay off its current liabilities with its most liquid asset (cash).
- Total asset turnover measures how much in sales is generated by each dollar of firm assets.
- Equity multiplier represents the degree of leverage for an equity investor of the firm; it measures the dollar worth of firm assets each equity dollar has a claim to.
- Long-term debt ratio measures the percentage of total firm capitalization funded by long-term debt.
- Times interest earned ratio provides a relative measure of how well the firm’s operating earnings can cover current interest obligations.
- Profit margin is the accounting measure of bottom-line profit per dollar of sales.
- Return on assets is a measure of bottom-line profit per dollar of total assets.
- Return on equity is a measure of bottom-line profit per dollar of equity.
- Price-earnings ratio reflects how much value per share the market places on a dollar of accounting earnings for a firm.
