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What might a consistently rising cost of sales as a percentage of revenue suggest about a company?
What might a consistently rising cost of sales as a percentage of revenue suggest about a company?
How does a falling gross profit margin ratio affect a company’s financial outlook?
How does a falling gross profit margin ratio affect a company’s financial outlook?
What is a significant factor impacting the gross profit margin of companies reliant on commodities?
What is a significant factor impacting the gross profit margin of companies reliant on commodities?
Why is it essential to identify the causes of changes in a company’s cost structure?
Why is it essential to identify the causes of changes in a company’s cost structure?
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What does a company's dividend record primarily indicate?
What does a company's dividend record primarily indicate?
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What is the primary purpose of liquidity ratios for investors?
What is the primary purpose of liquidity ratios for investors?
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How is working capital determined?
How is working capital determined?
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What does a working capital ratio of 2.84 to 1 signify?
What does a working capital ratio of 2.84 to 1 signify?
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Frequent causes of business failure often relate to which of the following factors?
Frequent causes of business failure often relate to which of the following factors?
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What is another name for the working capital ratio?
What is another name for the working capital ratio?
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What does the gross profit margin ratio indicate about a company's operations?
What does the gross profit margin ratio indicate about a company's operations?
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Which financial metric accounts for both expenses and taxes in evaluating management efficiency?
Which financial metric accounts for both expenses and taxes in evaluating management efficiency?
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How is the net profit margin calculated?
How is the net profit margin calculated?
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What does a declining trend in the return on common equity indicate?
What does a declining trend in the return on common equity indicate?
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Why is it necessary to exclude the share of profit of associates when comparing companies?
Why is it necessary to exclude the share of profit of associates when comparing companies?
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What does the formula for return on common equity measure?
What does the formula for return on common equity measure?
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In assessing a company's profitability, which margin best sums up management's performance over a period?
In assessing a company's profitability, which margin best sums up management's performance over a period?
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Which of the following reflects how efficiently a company uses its investment capital?
Which of the following reflects how efficiently a company uses its investment capital?
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What implication can be drawn from a high gross profit margin?
What implication can be drawn from a high gross profit margin?
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What is a common misconception about the net profit margin?
What is a common misconception about the net profit margin?
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Study Notes
Cost of Sales Ratio
- The cost of sales ratio helps determine whether a company's costs are rising, stable, or falling in relation to sales.
- Rising trend over time indicates difficulty controlling costs and losing potential profits.
- Falling trend shows cost-effective operation and potential for future profitability.
- Understanding reasons for changes in this ratio is important.
Gross Profit Margin Ratio
- Measures a company’s ability to pay its operating costs.
- Influenced by raw material costs, especially for companies reliant on commodities.
- Introduction of new products with higher margins can improve profitability.
Dividend Record
- Shows how much the company distributes to shareholders in dividends.
- Can be found in Appendix A: Financial Statements of Trans-Canada Retail Stores Ltd.
Liquidity Ratios
- Evaluate a company's ability to convert assets into cash to meet short-term obligations.
- Insufficient working capital and difficulty liquidating current assets can lead to business failure.
- Working capital is calculated as total current assets minus total current liabilities.
Working Capital Ratio
- Measures the ability to meet current liabilities and reflects the company’s capacity to expand and take advantage of financial opportunities.
- Calculated by dividing current assets by current liabilities.
- A ratio of 2.84:1 indicates a company has $2.84 of cash and equivalents for every $1 of current liabilities.
Gross Profit Margin Ratio
- Shows profit after deducting the cost of goods sold from revenue.
- Calculated as (revenue - cost of sales) / revenue.
- A ratio of 35.50% means Trans-Canada Retail earns 35.50% of its revenue as gross profit.
Net Profit Margin Ratio
- Indicates management efficiency after considering expenses and taxes.
- Calculated as (profit - share of profit from associates) / revenue.
- Summarizes management's ability to run the business effectively.
- A ratio of 2.75% indicates 2.75% of revenue remains as profit.
Return on Common Equity Ratio
- Measures return on equity, showing earnings generated for each dollar invested by common shareholders.
- Calculated as profit / total equity.
- A declining trend suggests declining operating efficiency and less productive use of shareholder investment.
Preferred Shares
- Consider features like cumulative dividends, sinking funds, and protective provisions.
- Assess the yield compared to similar investments.
- For convertible preferred shares, consider the outlook for the common stock, the conversion price, and the duration of the conversion privilege.
Key Aspects of Company Analysis
- Company earnings highlight management’s resource utilization effectiveness.
- Statement of financial position reveals key operational aspects and factors impacting earnings.
- Financial ratios are most meaningful when compared over time and with companies in similar industries.
Liquidity Ratios
- Measure a company's ability to meet short-term commitments.
- The working capital ratio reflects a company's ability to meet obligations, expand business, and capitalize on financial opportunities.
- The quick ratio, or acid-test, provides a more conservative assessment of a company's ability to meet current obligations, focusing on cash and readily convertible assets.
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Description
This quiz covers key financial ratios including cost of sales ratio, gross profit margin ratio, dividend record, and liquidity ratios. Understanding these ratios is crucial for evaluating a company's financial health and operational efficiency. Test your knowledge on how these ratios impact profitability and asset management.
