•Ratios are an analyst's microscope; 
       they allow us get a better view of 
       the firm's financial health than just 
       looking at the raw financial 
       statements. Ratios are useful both 
       to internal and external analysts of 
       the firm. 
                           
      • Internal purposes:
      • Ratios can be useful in planning for the 
        future, setting goals, and evaluating the 
        performance of managers. 
      • External purposes:
      • External analysts use ratios to decide whether 
        to grant credit, to monitor financial 
        performance, to forecast financial 
        performance, and to decide whether to 
        invest in the company. 
                                
      Categories of Ratios:
      1. Liquidity ratios: describe the ability of a firm to meets 
        its current obligations.
      2. Efficiency ratios: describe how well the firm is using its 
        investment in assets to produce sales.
      3. Leverage ratios: reveal the degree to which debt has 
        been used to finance the firm's asset purchases.
      4. Coverage ratios: are similar to liquidity ratios in that 
        they describe the ability of a firm to pay certain 
        expenses.
      5. Profitability ratios: provide indications of how 
        profitable a firm has been over a period of time.
                                  
     Liquidity Ratios
     • The term liquidity refers to the speed with which an 
       asset can be converted into cash without large 
       discounts to its value. Some assets, such as accounts 
       receivable, can easily be converted to cash with only 
       small discounts. Other assets, such as buildings, can be 
       converted into cash very quickly only if large price 
       concessions are given. We therefore say that accounts 
       receivable are more liquid than buildings. All other 
       things being equal, a firm with more liquid assets will be 
       more able to meet its maturing obligations (i.e., its bills) 
       than a firm with fewer liquid assets. 
                           
      The Current Ratio
      • Generally, a firm's current assets are 
         converted to cash (e.g., collecting on accounts 
         receivables or selling its inventories) and this 
         cash is used to retire its current liabilities.
       
      • The higher the current ratio, the higher the 
         likelihood that a firm will be able to pay its 
         bills.