Profitability Ratios Quiz
40 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

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</p> Signup and view all the answers

    How is Earning per Share (EPS) calculated?

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

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

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

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

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

    Which formula represents the net profit ratio?

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

    Which aspect does the Earnings Price Ratio indicate?

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

    Which of the following is equivalent to operating profit?

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

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

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

    How is the operating profit ratio calculated?

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

    Which of the following is considered a quick asset?

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

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

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

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

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

    Which two components are essential for computing the cash ratio?

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

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

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

    Which of the following is NOT a capital structure ratio?

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

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

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

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

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

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

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

    What does the Net Profit Ratio measure?

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

    Which ratio assesses the operating performance of a business?

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

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

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

    How is the Return on Investment (ROI) calculated?

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

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

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

    What does the Expenses Ratio specifically compare?

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

    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

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    Financial Analysis and Planning – Ratio Analysis PDF

    Description

    Test your understanding of key profitability ratios, including Net Profit Ratio, Pre-tax Profit Ratio, and Operating Profit Ratio. This quiz covers calculations and significance of each ratio in evaluating business performance. Perfect for students studying finance or accounting.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser