In learning about ratios, we could simply study the different types or categories of ratios, or we could use ratios to answer some important questions about a firm's operations. We prefer the latter approach and have chosen the following four questions as a map in using financial ratios:
- How liquid is the firm?
- Is management generating adequate operating profits on the firm's assets?
- How is the firm financing its assets?
- Are the owners (stockholders) receiving an adequate return on their investment?