SUMMARY
Financial ratios, representing the relationship between two sets of financial data, are the indicators of a firm’s performance and provide vital information in which the management, the creditors, the investors and financial analysts in general are interested. The firm’s ratios are compared with the industry norm, with those of similar firms in other industry or industries or on a time-series basis. This comparison makes deviations clear and the management adopts financial measures accordingly.
There are broadly three types of ratios: the liquidity ratio which indicates the liquidity position in a firm and manifests in various forms, e.g., current ratio, quick ratio, receivables ratio and inventory turnover ratio, the profitability ratio ...
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