(a)

Ratios can be classified into three types, which measure three different aspects of a companys financial health: 1. Liquidity ratiosThese measure a companys ability to pay its current obligations. 2. Solvency ratiosThese measure a companys ability to pay its long-term obligations and survive over the long-term. 3. Profitability ratiosThese measure the ability of the company to generate a profit. 1. Examples of liquidity measures are: Working capital = Current assets Current liabilities Current ratio = 2.

(b)

Current assets Current liabilities

Examples of solvency measures are: Debt to total assets ratio =

Total liabilities Total assets

3.

Free cash flow = Cash provided by operating activities Capital expenditures Cash dividends Example of profitability measure: Earnings per share =

Net income Preferred stock dividends Average common shares outstanding

(c)

There are three bases for comparing a companys results: The bases of comparison are: 1. IntracompanyThis basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. 2. Industry averagesThis basis compares an item or financial relationship of a company with industry averages (or norms). 3. IntercompanyThis basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.