Financial Ratios and Accounting Measurements Quiz

Financial Ratios

• The Debt-to-Equity Ratio measures a firm's ability to repay long-term debt.
• The Return on Investment (ROI) measures a firm's use of its assets and control of its expenses to generate an acceptable rate of return.
• The Price-to-Earnings (P/E) Ratio measures investor response to owning a company's stock and also the cost of issuing stock.

Financial Statements

• The Income Statement summarizes the net sales, cost of goods sold, and gross profit of a company.

Financial Terms

• EBIT stands for Earnings Before Interest and Taxes.
• COGS stands for Cost of Goods Sold.

Financial Ratios (continued)

• The Current Ratio measures the availability of cash to pay debt.
• The Asset Utilization Ratio measures the effectiveness of the firm's use of resources.
• The Long-Term Debt-to-Equity Ratio quantifies the firm's ability to repay long-term debt.
• The Price-to-Earnings (P/E) Ratio measures investor response to owning a company's stock.
• The Return on Equity (ROE) calculates the return on investment for shareholders.
• The Debt Ratio measures the firm's use of debt to finance its operations.
• The Price-to-Book (P/B) Ratio is used to assess the value of an investment in a company's shares.
• The Operating Cash Flow Ratio measures the firm's ability to generate cash flow from its operations.

Financial Ratio Analysis

• Financial ratios are used to compare the strengths and weaknesses of various companies.
• Ratios can be calculated using data from financial statements, industry averages, and market data.
• Financial ratios are often expressed as a decimal value, but can be quoted as a percentage when always or usually less than 1.
• The reciprocal of a ratio expresses the inverse of the original ratio.
• A P/E ratio of 20 corresponds to an earnings yield of 5%.