The correct answer is: All of the above.
Ratio analysis is a tool used to assess the financial health of a company. It involves comparing different financial metrics to identify trends and patterns. Ratio analysis can be used by shareholders, firm’s management, banks of the firm, and financial analysts to make informed decisions about the company.
Shareholders use ratio analysis to assess the company’s performance and to make decisions about whether to buy, hold, or sell shares. Firm’s management use ratio analysis to track the company’s performance and to identify areas where improvement is needed. Banks of the firm use ratio analysis to assess the company’s creditworthiness and to decide whether to lend money to the company. Financial analysts use ratio analysis to provide investment advice to clients.
Some of the most common ratios used in financial analysis include:
- Return on equity (ROE): This ratio measures the company’s profitability by dividing net income by shareholders’ equity.
- Return on assets (ROA): This ratio measures the company’s profitability by dividing net income by total assets.
- Debt-to-equity ratio (D/E): This ratio measures the company’s financial leverage by dividing total debt by total equity.
- Current ratio: This ratio measures the company’s liquidity by dividing current assets by current liabilities.
- Quick ratio: This ratio measures the company’s liquidity by dividing quick assets by current liabilities.
- Inventory turnover ratio: This ratio measures the company’s efficiency in managing inventory by dividing cost of goods sold by average inventory.
- Days sales outstanding (DSO): This ratio measures the company’s efficiency in collecting receivables by dividing accounts receivable by average daily sales.
- Asset turnover ratio: This ratio measures the company’s efficiency in using its assets to generate sales by dividing net sales by average total assets.
- Profit margin: This ratio measures the company’s profitability by dividing net income by net sales.
- Gross margin: This ratio measures the company’s profitability by dividing gross profit by net sales.
- Operating margin: This ratio measures the company’s profitability by dividing operating income by net sales.
Ratio analysis is a powerful tool that can be used to assess the financial health of a company. However, it is important to note that ratio analysis is only one tool that should be used in conjunction with other analysis methods, such as cash flow analysis and trend analysis.