Textbook Problem

Briefly explain the difference between liquidity, solvency, and profitability analysis.

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities,

profitability, and overall performance of a company.

To determine: the differences between liquidity, solvency, and profitability ratios.

Explanation of Solution

In general, as said above, financial ratios are mainly used for evaluation of the liquidity, capabilities, profitability, and overall performance of a company.

 Thus, following are the financial ratios and its measure:

• Liquidity ratio: Liquidity ratios are used to measure the ability of the company towards fulfilling the obligations and requirements of the cash at the short-term.  Some of the ratios are current ratio, acid-test ratio, inventory turnover ratio, and accounts receivable ratio.
• Solvency ratio: Next, solvency ratios are those ratios used to measure the ability of the company towards survival for a longer period.
• Profitability ratio: Profitability ratios are those ratios used to measure the extent of income for particular time period.

Conclusion

Thus, above are the differences between liquidity, solvency, and profitability ratios.