Market participants including auditors and financial analysts utilize the income statements and balance sheet data to derive financial ratios and assess financial performance of a firm. Many categorizations have been proposed. One that is generally accepted groups them into 5 categories: 1) liquidity ratios, which include current and quick ratios, 2) asset management ratios such as total asset turnover, fixed asset turnover, inventory turnover and days sales outstanding, 3) debt management ratios, which includes total debt ratio and times interest earned, 4) profitability ratios such as profit margin, return on assets and return on equity, and finally for public companies 5) market value ratios such as market to book and price to earnings or cash flow ratios (Keown et al., 2014). Do you believe that this broad categorisation of ratios allows one to form a fair opinion of a company’s financial position and if so which category should be emphasized further? How do you see in this context the usefulness of analysis tools like the vertical, trend and horizontal analysis?
