Understanding Financial Ratios

What is the formula for the current ratio?

• Current Ratio = Total Assets / Total Liabilities

• Current Ratio = Current Assets / Current Liabilities

• Current Ratio = Current Liabilities / Current Assets

• Current Ratio = Current Assets + Current Liabilities

How do you calculate the quick ratio?

• Quick Ratio = (Total Assets - Total Liabilities) / Current Liabilities

• Quick Ratio = (Inventory + Cash) / Current Assets

• Quick Ratio = (Cash + Inventory) / Total Liabilities

• Quick Ratio = (Cash + Cash Equivalents + Accounts Receivable) / Current Liabilities

What does a liquidity ratio indicate about a company?

• A liquidity ratio measures a company's overall profitability.

• A liquidity ratio indicates a company's market share.

• A liquidity ratio indicates a company's ability to cover its short-term liabilities.

• A liquidity ratio reflects a company's long-term investment strategy.

What is the formula for return on equity (ROE)?

• ROE = Average Shareholders' Equity / Net Income

• ROE = Net Income / Total Assets

• ROE = Net Income / Average Shareholders' Equity

• ROE = Total Assets / Net Income

How is net profit margin calculated?

• Net profit margin = (Total Revenue / Net Profit) x 100

• Net profit margin = (Gross Profit / Total Revenue) x 100

• Net profit margin = (Net Profit / Total Revenue) x 100

• Net profit margin = (Net Profit - Total Revenue) x 100

What does a high return on assets (ROA) signify?

• It indicates a high level of debt management.

• It shows a company's market share is increasing.

• It signifies efficient use of assets to generate profit.

• It reflects poor asset utilization leading to losses.

What is the debt-to-equity ratio used for?

• It is used to calculate a company's total revenue.

• It is used to assess a company's financial leverage.

• It is used to evaluate employee performance.

• It is used to determine the market share of a company.

How do you calculate the interest coverage ratio?

• Interest Coverage Ratio = EBIT / Interest Expenses

• Interest Coverage Ratio = Cash Flow from Operations / Current Liabilities

• Interest Coverage Ratio = Operating Income / Total Revenue

• Interest Coverage Ratio = Net Income / Total Assets

What does a leverage ratio tell you about a company's financial structure?

• A leverage ratio measures a company's profitability over time.

• A leverage ratio indicates the total revenue generated by a company.

• A leverage ratio shows the market share of a company in its industry.

• A leverage ratio indicates the degree to which a company is financing its operations through debt versus equity.

What is the formula for inventory turnover?

• Inventory Turnover = Cost of Goods Sold / Average Inventory

• Inventory Turnover = Average Inventory / Cost of Goods Sold

• Inventory Turnover = Cost of Goods Sold / Ending Inventory

• Inventory Turnover = Total Sales / Total Assets