how financial ratios interprete the financial position of a company.?

Question

i mean what the profitability ratio, liquidity ratio, efficency ratio shows?

Answer 1

In general, the ratios allow you to compare companies in the same or similar industries quickly without going into a detailed analysis.

For example (and these are just examples - I'm pulling these numbers out of thin air):

Company A has a profitibility ratio of 1:10, while company B has a profitibility ratio of 1:30. If the ratio is determined by comparing profits to gross sales, then company B has to have 3 times as much gross sales to make as much money as company A. Moral: invest in company A.

If company C has a liquidity ratio of 1:5, and company D has a liquidity ratio of 4:5, and this ratio is determined by comparing liquid assets to all assets, then company D is awash in cash or other liquid assets. Moral: stand back - there will be a stampede of corporate raiders heading for company D.

Different industries have different ratios just by the nature of their business. As I recall, you may be able to use these ratios to compare similar companies, but doing it across different industries can lead to problems. For example: comparing a profitibility ratio of a high-tech startup back before the dot.com bust to the automotive industry would have been lunacy.

It's been a long, LONG time since I've taken any business classes, so don't take these numbers or ratios or examples or definitions as gospel, or you'll end up like company Enron.

Answer 2

Efficiency ratio is expense over revenue. This ratio shows pretty much how well their expense account investments are paying off.


Liquidity ratio, or current ratio, is current assets over current liabilities. It measures a companies ability to quickly pay down its short term liabilities.


Profitability ratio(s)- This is actually a very broad range of ratios, not just one. The general purpose is usually to tell how much actual income (net, operating etc,), as a percentage, of something else, such as total revenue.