Financial Ratios

Running Head : FINANCE

Importance of Financial Ratios

Student

University

Professor

Subject

Importance of Financial Ratios

Financial ratios can show the firm 's progress , trends or potential problem areas . In addition , financial ratios can aid bankers and investors in assessing risks and deciding whether or not to lend money or invest in one company (Peabody , 2008 . Moreover , ratios can indicate a company 's performance or its financial status through the information obtained from financial statements . Financial ratios are also used to compare one company 's financials against other

firms . Sometimes , a firm 's future bankruptcy can be predicted using ratio analysis (NetMBA 2007 . The four types of financial ratios include liquidity profitability , leverage , and turnover ratios

Liquidity

One incident showing the importance of liquidity to banks , especially to the investors , is the September 11 attack . After the attack , many investors realized how important liquidity was , especially since they did not have access to cash and investment when the financial system was shut down . Following the attack , investors should ensure that there must be some portions of their net worth that are liquid (Kennon , The Importance of Liquidity ' 2009

Liquidity refers to the ability of something to be turned into cash Liquid assets refer to things that can be turned to hard cash immediately . Liquidity ratios indicate a company 's capability to meet the short-term financial obligations . The current ratio and the quick ratio are the most frequently used ratios . For most short-term creditors , a high current ratio is more because...