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Questions and Answers
Which of the following ratios measures a company's ability to sustain its operations indefinitely by comparing debt levels with equity, assets, and earnings?
Which of the following ratios measures a company's ability to sustain its operations indefinitely by comparing debt levels with equity, assets, and earnings?
- Profit Margin Ratio
- Current Ratio
- Debt-to-Equity Ratio (correct)
- Times Interest Earned Ratio
Which of the following ratios focuses on a company's return on investment in inventory and other assets?
Which of the following ratios focuses on a company's return on investment in inventory and other assets?
- Return on Assets (ROA) (correct)
- Activity Ratio
- Quick Ratio
- Gross Margin Ratio
Which of the following ratios refers to a company's ability to be efficient in its operations, specifically the speed with which various current accounts are converted into sales and cash?
Which of the following ratios refers to a company's ability to be efficient in its operations, specifically the speed with which various current accounts are converted into sales and cash?
- Equity Ratio
- Working Capital Ratio
- Activity or Efficiency Ratio (correct)
- Times Interest Earned Ratio
What is the main purpose of profitability ratios?
What is the main purpose of profitability ratios?
Which of the following ratios is considered a measure of a company's liquidity and ability to pay its short-term obligations?
Which of the following ratios is considered a measure of a company's liquidity and ability to pay its short-term obligations?
Which of the following ratios measures a company's ability to cover its interest payments from its operating profits?
Which of the following ratios measures a company's ability to cover its interest payments from its operating profits?
What is the formula for calculating the current ratio?
What is the formula for calculating the current ratio?
In the given scenario, what is the Quick Ratio?
In the given scenario, what is the Quick Ratio?
If the Total Receivables are $23,500, what is the value of 'X' in the equation Total Receivables = 1.7 = (20,000 + 7,500 + X) ÷ 30,000?
If the Total Receivables are $23,500, what is the value of 'X' in the equation Total Receivables = 1.7 = (20,000 + 7,500 + X) ÷ 30,000?
What is the type of ratio represented by Income before interest and taxes (EBIT) ÷ Interest Expense?
What is the type of ratio represented by Income before interest and taxes (EBIT) ÷ Interest Expense?
What does the Quick Ratio indicate about a company?
What does the Quick Ratio indicate about a company?
In terms of financial ratios, what does a current ratio of 3.11 suggest?
In terms of financial ratios, what does a current ratio of 3.11 suggest?
Which of the following ratios measures the efficiency of a company's management in utilizing its assets?
Which of the following ratios measures the efficiency of a company's management in utilizing its assets?
What is the primary objective of profitability ratios?
What is the primary objective of profitability ratios?
Which of the following is NOT a commonly used leverage ratio?
Which of the following is NOT a commonly used leverage ratio?
What is the primary purpose of liquidity ratios?
What is the primary purpose of liquidity ratios?
Which of the following ratios is used to measure a company's ability to generate sales from its assets?
Which of the following ratios is used to measure a company's ability to generate sales from its assets?
What is the primary purpose of investment leverage ratios?
What is the primary purpose of investment leverage ratios?
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Study Notes
Financial Ratio Analysis
- Financial ratio analysis helps to:
- Evaluate a company's ability to sustain operations
- Identify going concern issues and a firm's ability to pay its bills in the long term
- Compare a company's performance with others
- Determine the degree of efficiency of management and utilization of assets
- Assess overall profitability and return on investment
Categories of Financial Ratios
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- Liquidity Ratios:
- Analyze a company's ability to pay off current and long-term liabilities
- Evaluate cash levels and ability to turn assets into cash
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- Leverage Ratios (Capital Structure or Solvency Ratios):
- Debt-to-Equity Ratio: compares debt levels with equity
- Debt Ratio: compares debt levels with assets and earnings
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- Profitability Ratios:
- Gross Margin Ratio
- Profit Margin Ratio (Return on Sales)
- Return on Assets (ROA)
- Return on Capital Employed
- Return on Equity
- Return on Investment
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- Activity or Efficiency Ratios:
- Measure a company's ability to be efficient in its operations
- Evaluate the speed with which current accounts are converted into sales and cash
Ratio Calculations
- Current Ratio: Current Assets ÷ Current Liabilities
- Quick Ratio (Acid Test Ratio): Quick Assets ÷ Current Liabilities
- Times Interest Earned Ratio (Interest Coverage Ratio): Income before interest and taxes (EBIT) ÷ Interest Expense
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