How Financial Ratios are Used in Business

Subject: Information on Financial Ratios and their Utility in Business
Dear [Coworker],
I hope this email finds you well. I am writing to explain the five types of financial ratios used in business and their utility. Financial ratios are important tools for evaluating a company's financial performance and position with each type providing different information. By understanding these ratios and their utility, businesses can make informed decisions about their operations and financial strategies.
Liquidity ratio describes the ratios that are used to determine the extent to which a given business can manage to meet its short-term obligations. A business can effectively use liquidity ratios such as the current ratio to gain insights into its ability to generate cash and pay its bills on time (Bondinuba et al., 2022). with the help of a liquidity ratio, one can determine the short-term financial health of the business so that it can make investment decisions and identify ways through which the company can manage its financial management practices.
On the other hand, the solvency ratio helps a business to determine the extent to which it can meet its long-term debts and obligations. Thus, a business can determine whether it has enough long-term assets to cover its long-term liabilities by analyzing its solvency ratios. Just like liquidity ratios, solvency ratios can be used to inform investment decisions as well as identify potential areas where it can improve its financial practices. For example, a company with a high debt-to-equity ratio may need to re-evaluate its financing strategy to reduce its reliance on debt financing (Bondinuba et al., 2022).
Profitability ratios are used to measure the extent to which a given business can yield profits. By analyzing profitability ratios, a business can determine whether it is operating efficiently, generating profits at a level that is sustainable ...