Accounting ratios can be classified into five categories:
- Liquidity ratios measure a company’s ability to meet its short-term obligations. Examples of liquidity ratios include the current ratio, the quick ratio, and the cash ratio.
- Profitability ratios measure a company’s ability to generate profits. Examples of profitability ratios include the profit margin, the return on equity, and the return on assets.
- Solvency ratios measure a company’s ability to meet its long-term obligations. Examples of solvency ratios include the debt-to-equity ratio, the debt-to-assets ratio, and the interest coverage ratio.
- Efficiency ratios measure how efficiently a company uses its assets. Examples of efficiency ratios include the asset turnover ratio, the inventory turnover ratio, and the days sales outstanding ratio.
- Growth ratios measure a company’s ability to grow its sales and profits. Examples of growth ratios include the sales growth rate, the profit growth rate, and the earnings per share growth rate.
It is important to note that accounting ratios can be affected by a number of factors, including the company’s industry, its size, and its accounting practices. As a result, it is important to compare a company’s ratios to its industry peers or to its own historical performance in order to get a more accurate understanding of its financial health.