Final answer:
Liquidity ratios assess short-term financial health, solvency ratios evaluate long-term debt sustainability, and profitability ratios measure earning efficiency and growth potential. They are important for analyzing risk and making informed financial decisions.
Step-by-step explanation:
Each type of financial ratio measures a different aspect of a company's financial health. (a) Liquidity ratios are used to determine a company's ability to meet its short-term obligations. They include measures such as the current ratio and the quick ratio, which help investors and creditors understand how well the company can cover its short-term liabilities with its short-term assets. (b) Solvency ratios, such as the debt-to-equity ratio and the interest coverage ratio, assess a company's long-term stability and its ability to repay long-term debts. These ratios measure the sustainability of a company's debt levels. (c) Profitability ratios like net profit margin, return on assets (ROA), and return on equity (ROE) evaluate a company's ability to generate earnings relative to its revenue, assets, equity, and other factors. Profitability ratios provide insight into the company's operational efficiency and its potential for growth and dividend distribution. Analyzing these ratios is essential for stakeholders to analyze the risk involved in different types of financial assets and make informed decisions in the financial market.