Question

What ratios would you compute to evaluate management performance?

Short answer

The current ratio, acid-test ratio, return on total assets, profit margin ratio, debt-to-equity ratio, earnings per share and so on.

Step-by-step solution

Explanation of ratio analysis

Ratio analysis is a tool used to measure the performance of the business for a particular period. It is expressed in percentage or proportion form. Ratios can be classified into categories such as liquidity and efficiency, solvency, profitability and market prospects.

Explanation on ratios used to evaluate the management performance

Although all the ratios are important for the analysis, some of the ratios that can be used to analyse the performance of management are as follows:

• The current ratio indicates the ability to satisfy the current liabilities by the current assets.
• Acid-test ratio indicates the ability to satisfy the current liabilities by quick assets.
• Return on total assets indicates the percentage return earned by the business on total assets.
• The profit margin ratio indicates the percentage margin earned by the business.
• The debt-to-equity ratio indicates the ratio of total debts and total equities of the business.
• Earnings per share indicate the income earned by the business on per share basis.