Understanding Ratio Analysis

What is the primary purpose of liquidity ratios?

• To determine the profitability of a company's operations.

• To analyze the market share of a company in its industry.

• To evaluate a company's long-term investment potential.

• The primary purpose of liquidity ratios is to assess a company's short-term financial stability.

Name two common liquidity ratios used in financial analysis.

• Current Ratio, Quick Ratio

• Debt-to-Equity Ratio

• Gross Profit Margin

• Return on Assets

How do profitability ratios help assess a company's performance?

• Profitability ratios are used to evaluate employee performance.

• Profitability ratios help assess a company's performance by indicating its ability to generate profit relative to revenue, assets, and equity.

• Profitability ratios measure a company's market share.

• Profitability ratios focus solely on a company's debt levels.

What is the formula for calculating the net profit margin?

• (Net Profit / Total Revenue) * 100

• (Net Profit + Total Revenue) * 100

• (Total Revenue - Net Profit) / Total Revenue

• (Net Profit / Total Expenses) * 100

Define leverage ratios and their significance in finance.

• Leverage ratios measure a company's revenue growth over time.

• Leverage ratios are used to evaluate employee performance in a company.

• Leverage ratios indicate the market share of a company in its industry.

• Leverage ratios assess a company's debt levels relative to its equity or assets, indicating financial risk and capital structure.

What does a high debt-to-equity ratio indicate about a company?

• It reflects a conservative approach to financing and investment.

• It indicates higher financial risk due to reliance on debt financing.

• It suggests the company is highly profitable and stable.

• It indicates a strong market position due to low debt.

Explain the importance of efficiency ratios in business operations.

• Efficiency ratios are only relevant for financial institutions.

• Efficiency ratios help businesses evaluate operational performance and resource utilization, leading to improved productivity and profitability.

• Efficiency ratios measure customer satisfaction levels.

• Efficiency ratios are used to determine employee salaries.

What is the asset turnover ratio and how is it calculated?

• Asset Turnover Ratio = Total Sales / Average Total Assets

• Asset Turnover Ratio = Total Assets / Total Liabilities

• Asset Turnover Ratio = Average Total Assets / Total Sales

• Asset Turnover Ratio = Net Income / Total Sales

Describe what market ratios measure in a company's financial health.

• Market ratios only measure a company's total revenue.

• Market ratios assess employee satisfaction and productivity.

• Market ratios measure a company's valuation and financial health relative to its earnings and book value.

• Market ratios evaluate a company's market share in its industry.

What is the price-to-earnings (P/E) ratio and why is it important?

• The P/E ratio indicates the total revenue generated by a company.

• The P/E ratio is a valuation metric that compares a company's share price to its earnings per share, indicating its market value relative to its earnings.

• The P/E ratio measures a company's total assets against its liabilities.

• The P/E ratio is the percentage of dividends paid to shareholders.