Ratios Can Be Used for Different Purposes

question 112

Essay

Ratios can be used for different purposes. For example, a variety of ratios have been developed to assess a firm's liquidity. Similarly, ratios have been developed to assess solvency, profitability, and stock market strength. A sample of commonly used ratios for these purposes is provided in the table below.Required:
In the middle column of the table, provide the formula to compute the specified ratio. In the final column, indicate the purpose (Liquidity, Solvency, Profitability, and Stock market strength) for which the ratio is most commonly used. The first item is completed as an example. $$\begin{array} { | l | l | l | l | } \hline & & & \\\hline & { \text { Ratio } } & { \text { Computation } } & \text { Purpose } \\\hline \text { 1. } & \text { Accounts receivable tumover } & \text { Net credit sales/average receivables } & \text { Liquidity } \\\hline \text { 2. } & \text { Asset turnover } & & \\\hline \text { 3. } & \text { Current ratio } & & \\\hline \text { 4. } & \text { Debt to equity ratio } & & \\\hline \text { 5. } & \text { Dividend yield } & & \\\hline \text { 6. } & \text { Earnings per share } & & \\\hline \text { 7. } & \text { Inventory turnover } & & \\\hline \text { 8. } & \text { Net margin } & & \\\hline \text { 9. } & \text { Price-eamings ratio } & & \\\hline \text { 10. } & \text { Return on equity } & & \\\hline \text { 11. } & \text { Return on investment } & & \\\hline\end{array}$$

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