Profitability Ratios Quiz

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Questions and Answers

What does the Dividend Yield ratio indicate?

  • Return based on paid up value of shares (correct)
  • Return based on average investment
  • Return on market value of shares
  • Return based on the net worth of the company

Which formula correctly represents Dividend Yield?

  • Change in share price/Initial share price × 100
  • Dividend per Share/DPS × Market Price per Share
  • Dividend ± Change in share price/Initial share price × 100 (correct)
  • Dividend per Share/DPS × Initial share price

What is the Earnings Yield also referred to as?

  • Earnings Return Ratio
  • Earnings Fair Value
  • Earnings Distribution Ratio
  • Earnings Price Ratio (correct)

What does a higher Market Value/Book Value ratio indicate?

<p>Higher shareholder position in terms of return (C)</p> Signup and view all the answers

How is Earning per Share (EPS) calculated?

<p>Earnings Yield × Market Price per Share (D)</p> Signup and view all the answers

What does the Dividend per Share (DPS) formula use as its denominator?

<p>Market Price per Share (B)</p> Signup and view all the answers

What does a high net profit ratio indicate about a business?

<p>Positive returns from the business (A)</p> Signup and view all the answers

Which formula represents the net profit ratio?

<p>Net Profit Ratio = Earnings after taxes × 100 / Sales (C)</p> Signup and view all the answers

Which aspect does the Earnings Price Ratio indicate?

<p>Return on investment (C)</p> Signup and view all the answers

What does the Net worth represent in the Market Value/Book Value ratio?

<p>Total equity available to shareholders (B)</p> Signup and view all the answers

What does the operating profit ratio assess?

<p>The percentage of sales retained after all costs except interest and taxes (B)</p> Signup and view all the answers

Which of the following is equivalent to operating profit?

<p>Sales - Cost of Goods Sold - Operating Expenses (D)</p> Signup and view all the answers

What does the pre-tax profit ratio measure?

<p>The proportion of profit before interest and taxes to sales (B)</p> Signup and view all the answers

Earnings before interest and taxes (EBIT) are used in which ratio?

<p>Operating Profit Ratio (A)</p> Signup and view all the answers

Which statement about the net profit ratio is true?

<p>It represents the company's profitability after all expenses (A)</p> Signup and view all the answers

How is the operating profit ratio calculated?

<p>Operating Profit × 100 / Sales (C)</p> Signup and view all the answers

What does the acid-test ratio primarily assess?

<p>The short-term liquidity of a business excluding inventories (C)</p> Signup and view all the answers

Which of the following is considered a quick asset?

<p>Accounts receivable (A)</p> Signup and view all the answers

What does an acid-test ratio of 1:1 indicate?

<p>The business can cover current obligations with quick assets (A)</p> Signup and view all the answers

Which of the following is a key component in calculating the cash ratio?

<p>Marketable securities (D)</p> Signup and view all the answers

The Basic Defense Interval formula measures what aspect of a business?

<p>Cash liquidity versus operating expenses (D)</p> Signup and view all the answers

If the majority of quick assets are in accounts receivable, what is a potential risk?

<p>Delayed collections impacting liquidity (B)</p> Signup and view all the answers

What is the primary purpose of quick assets in business analysis?

<p>To assess immediate liquidity available to meet obligations (B)</p> Signup and view all the answers

Which two components are essential for computing the cash ratio?

<p>Cash balances and current liabilities (B)</p> Signup and view all the answers

What does the equity ratio indicate about a business?

<p>The proportion of owner's fund to total fund invested (A)</p> Signup and view all the answers

Which ratio specifically assesses the long-term solvency of a firm?

<p>Debt Ratio (D)</p> Signup and view all the answers

What is included in total debt according to the content?

<p>Short and long term borrowings from various sources (C)</p> Signup and view all the answers

Which of the following is NOT a capital structure ratio?

<p>Interest Coverage Ratio (C)</p> Signup and view all the answers

How does a higher equity ratio affect the perception of risk for lenders?

<p>It suggests a lower degree of risk for lenders (B)</p> Signup and view all the answers

The debt to total assets ratio primarily compares which two components?

<p>Total debt and net assets (B)</p> Signup and view all the answers

What does the debt-service coverage ratio (DSCR) measure?

<p>The ability to cover interest payments (A)</p> Signup and view all the answers

Which ratio provides insight into the financing techniques of a business?

<p>All of the above (D)</p> Signup and view all the answers

What does the Net Profit Ratio measure?

<p>The relationship between net profit and sales (C)</p> Signup and view all the answers

Which ratio assesses the operating performance of a business?

<p>Operating Profit Ratio (C)</p> Signup and view all the answers

The Operating Expenses Ratio measures what aspect in relation to sales?

<p>Portion of specific expenses (C)</p> Signup and view all the answers

How is the Return on Investment (ROI) calculated?

<p>Return / Profit x 100 / Investments (D)</p> Signup and view all the answers

Which ratio indicates the proportion of financial expenses in relation to sales?

<p>Financial Expenses Ratio (A)</p> Signup and view all the answers

What does the Expenses Ratio specifically compare?

<p>Cost of Goods Sold to Sales (A)</p> Signup and view all the answers

The Operating Ratio is used to measure which of the following?

<p>Total Costs in relation to Sales (A)</p> Signup and view all the answers

The formula for calculating the Expenses Ratio is based on?

<p>Specific costs like COGS plus operating expenses divided by sales (A)</p> Signup and view all the answers

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Study Notes

Profitability Ratios

  • Net Profit Ratio: Measures the proportion of revenue remaining as profit after all expenses. A higher ratio signifies positive returns.
    • Can be calculated as: (Net Profit/Sales) x 100
    • or: (Earnings after taxes (EAT)/Sales) x 100
  • Pre-tax Profit Ratio: Measures the relationship between earnings before taxes (EBT) and sales.
    • Calculated as: (Earnings before taxes (EBT)/Sales) x 100
  • Operating Profit Ratio: Evaluates business operating performance. Measures the percentage of each sale that remains after costs and expenses (excluding interest and taxes).
    • Can be calculated as: (Operating Profit/Sales) x 100
    • or: (Earnings Before Interest & Taxes (EBIT)/Sales) x 100
    • Operating Profit: Sales - Cost of Goods Sold (COGS) - Operating Expenses
  • Dividend and Earning Yield: Indicates return on investment. A higher dividend percentage indicates greater return on the paid-up value of shares.
    • Calculated as: ((Dividend ± change in share price)/Initial share price) x 100
    • or: (Dividend per Share (DPS)/Market Price per Share (MPS)) x 100
  • Earnings Yield (EP Ratio): Measures the return on investment using closing investment value.
    • Calculated as: (Earnings per Share (EPS)/Market Price per Share (MPS)) x 100
  • Market Value/Book Value per Share (MV/BV): Evaluates how investors perceive the company's past and future performance.
    • Calculated as: (Average share price/(Net worth ÷ Number of equity shares))
    • or: (Closing share price/(Net worth ÷ Number of equity shares))
  • Quick Ratio (Acid Test Ratio): Measures the ability to meet short-term obligations with readily convertible assets.
    • Calculated as: (Quick Assets/Current Liabilities)
    • Quick assets: Cash and near-cash assets (excluding inventories).
  • Cash Ratio/Absolute Liquidity Ratio: Measures the absolute liquidity of a business based on only readily available cash and marketable securities.
    • Calculated as: ((Cash and Bank balances + Marketable Securities)/Current Liabilities)
    • or: ((Cash and Bank balances + Current Investments)/Current Liabilities)
  • Basic Defense Interval/Interval Measure: Measures the number of days a company can operate using its current cash and receivable balances.
    • Calculated as: ((Cash and Bank balances + Net Receivables + Marketable Securities) / (Operating Expenses ÷ Number of days in the period))

Capital Structure Ratios

  • These ratios provide insights into the financing techniques employed by a business, focusing on its long-term solvency position.
  • Equity Ratio: Represents the proportion of owner's funds to the total funds invested in the business.
    • Calculated as: (Shareholder's Equity/Net Assets)
    • Shareholder's equity includes Equity Share Capital and Reserves & Surplus.
    • Net Assets include Net Fixed Assets and Net Current Assets.
  • Debt Ratio: Measures the proportion of debt to total assets.
    • Calculated as: (Total Debt/Net Assets)
    • Total debt encompasses short and long-term borrowings.

### Coverage Ratios

  • These ratios assess a company's ability to meet its financial obligations through a specific coverage level.
  • Debt-Service Coverage Ratio (DSCR): Measures the ability to meet debt obligations (including principal and interest payments) using operating income.
  • Interest Coverage Ratio: Measures a company's ability to service interest payments on debt using earnings before interest and taxes (EBIT).
  • Preference Dividend Coverage Ratio: Measures a company's ability to meet preference dividend payments using available profits.
  • Fixed Charges Coverage Ratio: Measures a company's ability to meet all fixed charges (interest and preferred dividends) using earnings before interest and taxes (EBIT).

### Expenses Ratios

  • These ratios analyze a company's expenses in relation to its sales revenue.
  • Cost of Goods Sold (COGS) Ratio: Measures the percentage of revenue spent on producing the goods sold.
    • Calculated as: (COGS/Sales) x 100
  • Operating Expenses Ratio: Measures the proportion of revenue allocated to administrative, selling, and distribution expenses.
    • Calculated as: ((Administrative expenses + Selling & Distribution Overhead)/Sales) x 100
  • Operating Ratio: Measures total operating expenses (COGS and operating expenses) as a percentage of sales.
    • Calculated as: ((COGS + Operating expenses)/Sales) x 100
  • Financial Expenses Ratio: Measures the proportion of revenue allocated to financial charges (interest, etc.).
    • Calculated as: (Financial expenses/Sales) x 100

### Profitability Ratios related to Overall Return on Assets/ Investments

  • Return on Investment (ROI): Measures the overall profitability of a business, focusing on the return on investment, equity funds, capital employed, or total assets.
    • Calculated as: (Return/Profit/Earnings/Investments) x 100

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