Ratio analysis is the comparison of line items in the financial statements of a business. Ratio analysis is used to evaluate a number of issues with an entity, such as its liquidity, efficiency of operations, and profitability. List IList IIA. Test of activityDebtors turnover ratioThe ratio measures the number of days a business takes to pay its invoices and bills to its vendors, suppliers or other companies. It is calculated by: Days Payable Outstanding = Accounts Payable / (Cost of Sales/ Number of Days). The number of days is taken as 90 days for a quarter or 365 days for a year. The Debtors Turnover Ratio also called as Receivables Turnover Ratio shows how quickly the credit sales are converted into cash. This ratio measures the efficiency of a firm in managing and collecting the credit issued to the customers. B. Test of liquidityAcid test ratioAn acid-test ratio, also known as a quick ratio, is a financial measure of a company's ability to pay off its current liabilities “ that is, any debt that will need to be repaid within a year, such as credit card charges and accounts payable. It tests the level liquidity of a businessC. Test of profitabilityROIReturn on investment is a ratio between net profit and the cost of investment. A high ROI means the investment's gains compare favorably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investmentsD. Test of solvencyDebt equity ratioSolvency ratios consider a companies long-term financial wellbeing. The debt to equity (D/E) ratio indicates the degree of financial leverage (DFL) being used by the business and includes both short-term and long-term debt. A rising debt-to-equity ratio implies higher interest expenses, and beyond a certain point, it may affect a company's credit rating, making it more expensive to raise more debt.