ABSTRACT
This chapter helps us to gain an understanding of the components of the various categories of financial ratios, how they are calculated, what they indicate to financial management, and how to use financial ratios to maximize profitable operation of the company. It discusses components of financial ratios and ratios as indices. Ratios are found by dividing the magnitude of one entity into the other. Liquidity ratios measure the current assets of a company against its current liabilities. The amount of current assets and current liabilities is obtained from the company's balance sheet. The quick ratio is sometimes referred to as the "acid-test ratio" because it indicates whether a business can pay its short-term debt with assets that can be converted into cash in the shortest amount of time, meaning readily accessible cash from bank accounts, marketable securities, and accounts receivable.
