.
With the use of ratio analysis liquidity, profitability, and solvency can be calculated. This is done through dividing two specific numbers from the ledgers to find a percentage or number that will be capable of being compared to other companies. Each of these terms finds out a different factor that showcases either a positive or a negative about the company's financial situation. .
Liquidity.
Liquidity is an attempt to measure a company's capability of paying debts at the time that they are due. Liquidity becomes the information needed by dividing current cash by current liabilities, and is usually showcased in either ratio or percentage form. Liquidity ratio, or current ratio, is an emergency debt ratio, showing if the company is capable of covering their debts if things are not going correctly. There is also the knowledge of whether a company might be having issues paying all of their obligations currently on hand. Finally the liquidity ratio looks into the ability of a company to change their products into cash, this is a good knowledge to have again in the emergency aspect, if say the company is not selling their products, perhaps the items used to make the products can be sold in order to make the necessary payments. This occurs when companies are having trouble being paid on their receivables, or if their inventory is not turning over in a timely fashion. Liquidity ratio uses the formula Current Assets of a company divided by the current liabilities. Variables on the balance sheet can help to fill out the formulas in order to find the correct Liquidity Ratio. .
Profitability .
Profitability is the second of the three useful tools for investors to look into; it is the numbers that state how well a company can create assets in comparison to the expenditures that were taken on over the designated period of time. This can be done through the use of a ratio, and usually the higher it stands, the better the company is doing.
