Question

What are four main types of financial ratios used in ratio analysis?

Multiple select question.

a) Activity ratios
b) Income ratios
c) Debt ratios
d) Profitability ratios
e) Tax ratios

Answer 1

The four main types of financial ratios are activity ratios, debt ratios, profitability ratios, and liquidity ratios. Income ratios and tax ratios are not standard classifications. Levels of measurement for frequency tables vary and include ordinal, ratio, and nominal scales.

Step-by-step explanation:

The four main types of financial ratios used in ratio analysis are:

1. Activity ratios
2. Debt ratios
3. Profitability ratios
4. Liquidity ratios (which are not listed in the provided options)

Option b) Income ratios and option e) Tax ratios are not generally considered main types of financial ratios. Moreover, analyzing the risk involved in different types of financial assets and understanding what considerations are important to investors in the financial market are critical practices that rely on the use of these financial ratios.

When it comes to frequency, frequency tables, and levels of measurement:

• a. High school soccer players classified by their athletic ability uses an ordinal scale,
• b. Baking temperatures for various main dishes uses a ratio scale, and
• c. The colors of crayons in a 24-crayon box uses a nominal scale.

Answer 2

The four main types of financial ratios are activity ratios, debt ratios, profitability ratios, and some related to income, while tax ratios are not standard in financial analysis. These ratios are crucial for investors assessing company performance.

Step-by-step explanation:

The four main types of financial ratios used in ratio analysis are:

• Activity ratios: These measure how efficiently a company uses its assets to generate sales or revenue. Examples include inventory turnover and accounts receivable turnover ratios.
• Debt ratios: These provide insight into a company's leverage and ability to meet long-term obligations. The debt-to-equity ratio is a common example.
• Profitability ratios: These help analyze a company's ability to generate earnings relative to its revenue, assets, or shareholders' equity. Profit margin and return on equity are often used profitability ratios.
• Option b) Income ratios and e) Tax ratios are not standard categories of financial ratios. However, some ratios could be considered as being related to income, such as the price-to-earnings (P/E) ratio, which compares a company's share price to its earnings per share. Tax ratios are not customary in financial ratio analysis.

Investors often analyze these ratios to assess risk and determine the financial health and performance of a company before making investment decisions.