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Strengths And Weaknesses Of Financial Ratio

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2.0 FINANCIAL RATIOS
Financial ratios are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided in the financial statement. Financial ratios can be used to analyse trends and to compare the firm’s financial to those of other firms. In some cases, ratio analysis can predict future bankruptcy. Since a ratio is simply a mathematically comparison based on proportions, big and small companies can be use ratios to compare their financial information. In a sense, financial ratios don 't take into consideration the size of a company or the industry. Ratios are just a raw computation of financial position and performance. Ratios allow us to compare companies across industries, big and small, to identify their strengths and weaknesses. Financial ratios are often divided up into five main categories which liquidity, leverage, efficiency, profitability, and market ratios.
i. Liquidity Ratios
Liquidity ratios analyse the ability of a company to pay off both its current liabilities as they become due as well as their long-term liabilities as they become current. Liquidity ratios demonstrate a company 's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities. All small businesses require a certain degree of liquidity in order to pay their bills on time, though start-up and very young companies are

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