Financial accounting - Essay Example

Return kind of ratios represents the ability of a company to measure its overall efficiency more so in generating the returns to the shareholders. On the other hand, ratios that indicate margin illustrate the ability of the company to translate its sales dollars into profits. This therefore implies that the main purpose of profitability ratios is to measure the ability of a company to generate its earnings relative to assets, equity and sales. Liquidity ratios indicates the ability of a company to meet or pay off its short term debt obligations or short term liabilities as they fall due.

It indicates the company’s low default risk in case the ratios are more than one. The company’s current ratio is increasing over time indicating that the company’s ability is increasing as well. This means that the company is able to meet its short term liabilities with ease hence it is having a high performance. The company’s quick ratio is less than one implying that its most liquid assets are not enough to meet its short term obligations. This means that the company is over-leveraged, collecting its receivables slowly, paying its bills too quickly or struggling to grow or maintain sales.

However, the trend indicates an increase in the company’s most liquid assets evidenced by increase in quick ratio. Efficiency ratio assist the company to measure how effectively it is utilizing its assets and or how well its liabilities are managed. These ratios show how efficient the assets of a business are working to generate sales. They therefore assist a business manager conduct business better. They show how quickly a company’s money from credit sales is collected or the number of times a company’s inventory turns over.

Their main purpose is therefore to show how effective the management of the company is. The company has a high turnover ratios meaning that it is using few assets to generate more revenue hence it is very efficient in its