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Types of Ratios Video Lecture | Accountancy Class 12 - Commerce

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FAQs on Types of Ratios Video Lecture - Accountancy Class 12 - Commerce

1. What are the different types of ratios used in commerce?
Ans. In commerce, there are several types of ratios used to analyze financial performance. Some commonly used ratios include liquidity ratios (such as current ratio and quick ratio), profitability ratios (such as gross profit margin and return on investment), solvency ratios (such as debt-to-equity ratio and interest coverage ratio), activity ratios (such as inventory turnover ratio and accounts receivable turnover ratio), and market ratios (such as price-to-earnings ratio and dividend yield ratio).
2. How are liquidity ratios useful in commerce?
Ans. Liquidity ratios are used in commerce to assess a company's ability to meet its short-term obligations. These ratios provide insights into a company's liquidity position by comparing its current assets to current liabilities. For example, the current ratio measures whether a company has enough current assets to cover its current liabilities. A higher current ratio indicates better liquidity, while a lower ratio may suggest potential difficulties in meeting short-term obligations.
3. What do solvency ratios indicate in commerce?
Ans. Solvency ratios in commerce indicate a company's long-term financial stability and its ability to repay long-term debts. These ratios assess the proportion of a company's debt to its equity or its earnings before interest and taxes (EBIT). For instance, the debt-to-equity ratio compares a company's total debt to its shareholders' equity, providing insights into the level of financial risk a company carries. Higher solvency ratios generally indicate a stronger financial position.
4. How can activity ratios be used in commerce?
Ans. Activity ratios are employed in commerce to assess a company's operational efficiency and effectiveness. These ratios measure how effectively a company utilizes its assets to generate sales or revenue. For example, the inventory turnover ratio shows how quickly a company sells its inventory and replenishes it. A higher inventory turnover ratio suggests efficient inventory management, while a lower ratio may indicate slow-moving inventory or overstocking.
5. Why are profitability ratios important in commerce?
Ans. Profitability ratios play a crucial role in commerce as they evaluate a company's ability to generate profits from its operations. These ratios assess the relationship between a company's profits and its sales, assets, or equity. For instance, the gross profit margin ratio compares a company's gross profit to its sales revenue, indicating how efficiently it controls production costs. Higher profitability ratios generally indicate better financial performance and attractiveness for investors.
47 videos|109 docs|56 tests

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