Describe the three categories of ratios used in ratio analysis.

The three categories of ratios used in ratio analysis are profitability ratios, liquidity ratios, and efficiency ratios. Profitability ratios measure the company’s ability to generate income or profits through operations such as return on assets (ROA) or gross margin.

Liquidity ratios assess a company’s ability to pay off immediate debts by looking at its current assets/liabilities such as quick/current ratio. Efficiency ratios examine how efficiently a firm is using its resources; these include inventory turnover rate, days sales outstanding etc., Understanding all these different metrics helps provide greater insight into overall performance business thus allowing for more informed planning decisions going forward eventually.