Financial Ratios Quiz

A company has a current ratio of 1.5:1. Which of the following actions, assuming all else remains constant, would MOST likely decrease the current ratio?

• Purchasing additional inventory on credit.

• Collecting cash from accounts receivable.

• Selling a long-term asset for cash.

• Paying off a short-term loan with cash.

A company's debt-to-equity ratio has increased significantly over the past two years. What potential implication should stakeholders be MOST concerned about?

• The company's profitability has likely increased due to the use of leverage.

• The company's ability to generate cash flow has strengthened, allowing for greater debt repayment capacity.

• The company's operational efficiency has improved, leading to higher asset turnover.

• The company's financial risk has likely increased, making it more vulnerable to economic downturns and interest rate hikes.

A company has a high inventory turnover ratio compared to its industry average. While generally positive, what potential drawback might this indicate if considered in isolation?

• The company might be experiencing stockouts, leading to lost sales and dissatisfied customers.

• The company is holding too much inventory, leading to high storage costs.

• The company's cost of goods sold is too low, impacting profitability.

• The company's sales are declining, resulting in a faster movement of existing inventory.

A company reports a gross profit margin of 40%. If its sales revenue is Php500,000 and its operating expenses are Php120,000, what is the company's net profit margin?

• 16%

• 64%

• 60%

• 24%

A company has total assets of Php1,000,000 and a return on assets (ROA) of 10%. If the company's net profit margin is 5%, what is the company's asset turnover ratio?

• 0.5 times

• 5.0 times

• 2.0 times

• 50.0 times

A company's quick ratio is significantly lower than its current ratio. What does this discrepancy MOST likely suggest about the company's asset structure?

• The company relies heavily on inventory to meet its short-term obligations.

• The company has a large portion of its current assets tied up in highly liquid assets like cash and marketable securities.

• The company has a substantial amount of accounts receivable that are quickly being converted to cash.

• The company has very few short-term liabilities.

An investor is comparing two companies in the same industry. Company A has a higher profit margin but a lower asset turnover ratio than Company B. Which of the following statements is the MOST reasonable interpretation of this information?

• Company A is likely generating more sales revenue than Company B.

• Company B is more effective at controlling its expenses than Company A.

• Company A is generating more profit per dollar of sales, while Company B is more efficient at using its assets to generate sales.

• Company B is likely to have a higher return on equity than Company A.

A company has earnings before interest and taxes (EBIT) of Php200,000 and interest expense of Php40,000. What is the company's times interest earned (TIE) ratio, and what does it primarily indicate?

• 5.0 times, indicating a strong ability to cover interest obligations.

• 0.2 times, indicating a low ability to cover interest obligations.

• 4.0 times, indicating a moderate level of profitability.

• 6.0 times, indicating efficient management of operating expenses.

A company's average collection period for accounts receivable has increased from 30 days to 45 days. Assuming no significant changes in credit terms, what could be a potential reason for this increase that warrants investigation?

• The company has become more efficient at collecting its receivables.

• The company's inventory turnover has increased.

• The company's sales have significantly decreased.

• The company has offered more lenient credit terms to attract more customers.

When evaluating a company's financial health using ratios, why is it essential to compare these ratios to industry averages and the company's historical performance?

• To ensure the company's accounting practices comply with all legal regulations.

• To calculate the precise amount of taxes the company will owe.

• To determine the exact market value of the company's stock.

• To understand the company's performance in a broader context.