Financial Ratios
Financial ratios are divided into multiple categories. Each category addresses different aspects of the business. Firstly, a company can assess its ability to generate profits with the profitability ratios. The profitability ratios consider various business expenses (CFI Education Inc., 2022). If a business records a higher profitability ratio in 2022 than in 2021, this confirms that it has generated more revenue. The percentages in this category include profit margin and gross margin. These ratios help an organization determine if its margins are sufficient compared to market prices. The organization can reduce the margins and sell more volumes or increase the margins to capture a specific market segment. Such adjustments must match the company’s business strategy and, in turn, affect the gross margin.
Secondly, efficiency ratios are used to assess the business’ utilization of the assets and liabilities at its disposal to generate revenue through sales. Improved efficiency ratios enable the business to create more profits and revenues. The asset turnover ratio falls in this category. Businesses use this ratio to assess the company’s utilization of assets to make sales. An industry with a high asset turnover ratio performs better than a significantly low asset turnover ratio (CFI Education Inc., 2022). This information can help an organization make decisions that facilitate better utilization of assets. Get in touch with us at eminencepapers.com. Our homework help will save you the tons of energy and time required for your homework paper.
Finally, liquidity ratios assess an organization’s ability to fulfil debt obligations. This assessment is based on a company’s assets. Companies with financial challenges have difficulties paying their debts. The available assets can be liquidated into cash to enable payment of pending debts easily. The quick ratio is one of the liquidity ratios businesses can use when seeking credit. For instance, banks use the quick ratio to determine the company’s ability to honour its debt obligations (CFI Education Inc., 2022).
Reference
CFI Education Inc. (2022). Ratio Analysis.
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Question 
Financial Ratios
Financial statement analysis focuses primarily on isolating information useful for making a particular decision. Through ratio analysis, users of financial data can analyze various relationships between items reported.
Respond to the following in a minimum of 175 words:
Describe the three main categories of ratios and provide a specific example of a balance used in each type. For each of the three ratios you selected, describe how it is used in managerial decision-making.