Which three factors are most commonly measured using financial ratios?

• A. Liquidity, profitability, and solvency
• B. Tax rates, inflation, and government spending
• C. Inventory turnover, customer loyalty, and brand value
• D. Market share, employee satisfaction, and innovation

Answer: (A)

Verified step by step guidance

1. Understand the purpose of financial ratios: Financial ratios are tools used to evaluate a company's financial health and performance. They provide insights into various aspects of the business, such as its ability to meet short-term obligations, generate profits, and sustain long-term operations.
2. Identify the three key factors commonly measured using financial ratios: Liquidity, profitability, and solvency are the primary factors assessed. Liquidity measures a company's ability to meet short-term obligations, profitability evaluates its ability to generate earnings, and solvency assesses its capacity to meet long-term obligations.
3. Compare the options provided in the problem: Analyze each set of factors to determine which aligns with the purpose of financial ratios. For example, tax rates, inflation, and government spending are macroeconomic factors, not financial ratios. Inventory turnover, customer loyalty, and brand value are operational or qualitative metrics, not financial ratios. Market share, employee satisfaction, and innovation are strategic or qualitative measures, not financial ratios.
4. Select the correct answer based on the analysis: Liquidity, profitability, and solvency are the factors most commonly measured using financial ratios, as they directly relate to a company's financial health and performance.
5. Review the reasoning: Ensure the selected answer aligns with the purpose of financial ratios and the definitions of liquidity, profitability, and solvency. This step reinforces understanding and confirms the accuracy of the solution.