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What financial ratios best indicate whether a business is operationally healthy?
Asked on Oct 21, 2025
Answer
Financial ratios are essential tools for assessing a business's operational health, offering insights into efficiency, profitability, and liquidity. Key ratios include the Current Ratio, Quick Ratio, Return on Assets (ROA), and Operating Margin, each providing a different perspective on the company's financial stability and operational effectiveness.
Example Concept: Financial ratios are quantitative measures derived from a company's financial statements, used to evaluate various aspects of its performance. The Current Ratio and Quick Ratio assess liquidity by comparing current assets to current liabilities, indicating the company's ability to meet short-term obligations. ROA measures how efficiently a company uses its assets to generate profit, while Operating Margin reflects the percentage of revenue remaining after covering operating expenses, highlighting operational efficiency.
Additional Comment:
- The Current Ratio is calculated as Current Assets divided by Current Liabilities.
- The Quick Ratio, a stricter measure, excludes inventory from current assets.
- ROA is calculated as Net Income divided by Total Assets.
- Operating Margin is Operating Income divided by Revenue.
- These ratios should be compared to industry benchmarks for context.
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