Chapter 3 presents the concept of financial analysis through the use of ratios. The chapter presents 13 ratios in four categories. Briefly explain the four categories and discuss why they would be important in making a stock purchase. In preparing your comments, assume you have $10,000 to invest in the stock market and you are trying to choose between companies in the same industry. How would you use the ratios presented in chapter 3 to decide what stock to purchase? Why would you take the time and effort to calculate the ratios instead of seeking investment advice from a market analyst?

Classification System

We will separate 13 significant ratios into four primary categories.

A. Profitability ratios

1.

Profit margin

2.

Return on assets (investment)

3. Return on equity

B. Asset utilization ratios

4.	Receivable turnover
5.	Average collection period
6.	Inventory turnover
7.	Fixed asset turnover
8.	Total asset turnover

C. Liquidity ratios

9. Current ratio 10. quick ratio
D. Debt utilization ratios 11. Debt to total assets 12. Times interest earned 13. Fixed charge coverage