In learning about ratios, we could simply study the different types or categories of ratios.

These categories have conventionally been classified as follows:

Liquidity ratios are used to measure the ability of a firm to pay its bills on time. Example ratios include the current and acid-test. Efficiency ratios reflect how effectively the firm has utilized its assets to generate sales. Examples of this type of ratio include accounts receivable turnover, inventory turnover, fixed asset turnover, and total asset turnover. Leverage ratios are used to measure the extent to which a firm has financed its assets with outside (non-owner) sources of funds. Example ratios include the debt, long-term debt-to-total-capitalization, and times interest earned. Profitability ratios serve as overall measures of the effectiveness of the firms management relative to sales and/or to investment. Examples of profitability ratios include the net profit margin, return on total assets, operating profit margin, operating return on assets, and return on common equity. These questions, along with the related ratios may be stated as follows: 1. How liquid is the firm? Current ratio Quick ratio Accounts receivable turnover (average collection period) Inventory turnover 2. Is management generating adequate operating profits on the firms assets? Operating return on assets = Operating Income = Operating Profit Margin x Total Assets Turnover Total Asset Operating profit margin Gross profit margin Asset turnover ratios, such as for total assets, accounts receivable, inventory, and fixed assets 3. How is the firm financing its assets? Debt to total assets or debt to equity Times interest earned 4. Are the owners (stockholders) receiving an adequate return on their investment? Return on common equity 5. Is the management team creating shareholder value? Price/Earnings Price/Book Economic Value Added