2. Profitability and activity ratios a background:
The financial ratio can be defined as a relationship between a two individual quantitative financial information connected with each other in some logical manner, and this connection, is considered as a meaningful financial indicator which can be used by the different financial information users.
Any financial ratio/s might be useful and meaningful if we compare it with other related meaningful information, either a present or past similar indicator/s for the same firm or similar firms in the same industry. Although financial ratios are considered useful and practical in financial analysis, these financial ratios should be interpreted and analyzed in a rational manner with caution taken into consideration the limitations of these financial ratios in order to get the expected meaningful result from it.
There are many financial ratios used by accountants and financial analysts, and most of these financial ratios can be classified as follows according to there use in financial analysis: 1-Liquidity Ratios 2-Activity (operational) Ratios 3-Profitability Ratios 4-Debt Ratios 5-Market Ratio