Part 1: Incomplete Sentences
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The company’s liquidity ratio indicates its ability to meet short-term obligations.
A) liability
B) liquidity
C) longevity
D) leverage
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A high debt-to-equity ratio may suggest that a company is taking on excessive risk.
A) debt-to-equity
B) profit-to-loss
C) asset-to-liability
D) cash-to-debt
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Investors often use the price-to-earnings ratio to determine if a stock is overvalued or undervalued.
A) price-to-cost
B) profit-to-revenue
C) price-to-earnings
D) dividend-to-yield
-
The gross profit margin is calculated by dividing gross profit by total revenue.
A) net profit margin
B) operating margin
C) gross profit margin
D) return on equity
-
A company’s return on assets measures how efficiently it uses its assets to generate profits.
A) return on equity
B) return on investment
C) return on capital
D) return on assets
-
The current ratio is a key indicator of a company’s short-term financial health.
A) quick ratio
B) current ratio
C) cash ratio
D) acid-test ratio
-
A high inventory turnover ratio generally indicates efficient inventory management.
A) inventory turnover ratio
B) accounts receivable turnover
C) asset turnover ratio
D) fixed asset turnover
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The operating margin shows how much profit a company makes on a dollar of sales after paying for variable costs of production.
A) net margin
B) profit margin
C) operating margin
D) gross margin
-
A low accounts receivable turnover might suggest problems with the company’s collection process.
A) accounts payable turnover
B) inventory turnover
C) asset turnover
D) accounts receivable turnover
-
The quick ratio is a more stringent measure of liquidity than the current ratio.
A) current ratio
B) cash ratio
C) quick ratio
D) working capital ratio
-
A high return on equity indicates that a company is using its investors’ funds effectively.
A) return on assets
B) return on investment
C) return on equity
D) return on capital
-
The dividend payout ratio shows the percentage of earnings paid to shareholders in dividends.
A) dividend yield
B) earnings per share
C) price-to-earnings ratio
D) dividend payout ratio
-
A low price-to-book ratio might indicate that a stock is undervalued.
A) price-to-sales ratio
B) price-to-earnings ratio
C) price-to-book ratio
D) enterprise value-to-sales ratio
-
The cash conversion cycle measures how long it takes for a company to convert its investments in inventory into cash.
A) cash flow cycle
B) operating cycle
C) cash conversion cycle
D) working capital cycle
-
A high asset turnover ratio suggests that the company is efficiently using its assets to generate revenue.
A) inventory turnover ratio
B) fixed asset turnover ratio
C) asset turnover ratio
D) accounts receivable turnover ratio
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The times interest earned ratio indicates a company’s ability to meet its debt obligations.
A) debt service coverage ratio
B) interest coverage ratio
C) times interest earned ratio
D) fixed charge coverage ratio
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A decreasing profit margin over time may indicate increasing competition or rising costs.
A) increasing profit margin
B) stable profit margin
C) decreasing profit margin
D) fluctuating profit margin
-
The working capital ratio is calculated by dividing current assets by current liabilities.
A) current ratio
B) quick ratio
C) cash ratio
D) working capital ratio
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A high debt-to-assets ratio may indicate that a company has aggressive leverage with high risk.
A) equity-to-assets ratio
B) debt-to-equity ratio
C) debt-to-assets ratio
D) long-term debt ratio
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The price-to-sales ratio can be useful when comparing companies within the same industry.
A) price-to-earnings ratio
B) price-to-book ratio
C) price-to-sales ratio
D) enterprise value-to-sales ratio
-
A low inventory turnover ratio might suggest overstocking or obsolescence.
A) accounts receivable turnover
B) inventory turnover ratio
C) asset turnover ratio
D) fixed asset turnover ratio
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The operating cash flow ratio measures how well current liabilities are covered by the cash flow generated from operations.
A) cash flow coverage ratio
B) operating cash flow ratio
C) free cash flow ratio
D) cash flow to debt ratio
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A high accounts payable turnover ratio indicates that the company pays its suppliers quickly.
A) accounts receivable turnover
B) inventory turnover
C) accounts payable turnover
D) asset turnover
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The fixed asset turnover ratio measures how efficiently a company uses its fixed assets to generate sales.
A) total asset turnover
B) inventory turnover
C) fixed asset turnover ratio
D) working capital turnover
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A low return on invested capital might suggest that the company is not allocating its capital efficiently.
A) return on equity
B) return on assets
C) return on invested capital
D) return on capital employed
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The gross margin ratio is an indicator of a company’s financial health and business model.
A) net profit margin
B) operating margin
C) gross margin ratio
D) profit margin
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A high debt service coverage ratio indicates that a company has sufficient income to pay its debt obligations.
A) interest coverage ratio
B) debt service coverage ratio
C) times interest earned ratio
D) fixed charge coverage ratio
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The enterprise value-to-EBITDA ratio is often used in valuing potential takeover targets.
A) price-to-earnings ratio
B) price-to-book ratio
C) enterprise value-to-EBITDA ratio
D) price-to-sales ratio
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A declining asset turnover ratio may indicate that a company is over-investing in assets.
A) increasing asset turnover
B) stable asset turnover
C) declining asset turnover ratio
D) fluctuating asset turnover
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The cash ratio is the most conservative liquidity ratio as it only considers cash and cash equivalents.
A) current ratio
B) quick ratio
C) cash ratio
D) working capital ratio
The company’s liquidity ratio indicates its ability to meet short-term obligations.
A) liability
B) liquidity
C) longevity
D) leverage
A high debt-to-equity ratio may suggest that a company is taking on excessive risk.
A) debt-to-equity
B) profit-to-loss
C) asset-to-liability
D) cash-to-debt
Investors often use the price-to-earnings ratio to determine if a stock is overvalued or undervalued.
A) price-to-cost
B) profit-to-revenue
C) price-to-earnings
D) dividend-to-yield
The gross profit margin is calculated by dividing gross profit by total revenue.
A) net profit margin
B) operating margin
C) gross profit margin
D) return on equity
A company’s return on assets measures how efficiently it uses its assets to generate profits.
A) return on equity
B) return on investment
C) return on capital
D) return on assets
The current ratio is a key indicator of a company’s short-term financial health.
A) quick ratio
B) current ratio
C) cash ratio
D) acid-test ratio
A high inventory turnover ratio generally indicates efficient inventory management.
A) inventory turnover ratio
B) accounts receivable turnover
C) asset turnover ratio
D) fixed asset turnover
The operating margin shows how much profit a company makes on a dollar of sales after paying for variable costs of production.
A) net margin
B) profit margin
C) operating margin
D) gross margin
A low accounts receivable turnover might suggest problems with the company’s collection process.
A) accounts payable turnover
B) inventory turnover
C) asset turnover
D) accounts receivable turnover
The quick ratio is a more stringent measure of liquidity than the current ratio.
A) current ratio
B) cash ratio
C) quick ratio
D) working capital ratio
A high return on equity indicates that a company is using its investors’ funds effectively.
A) return on assets
B) return on investment
C) return on equity
D) return on capital
The dividend payout ratio shows the percentage of earnings paid to shareholders in dividends.
A) dividend yield
B) earnings per share
C) price-to-earnings ratio
D) dividend payout ratio
A low price-to-book ratio might indicate that a stock is undervalued.
A) price-to-sales ratio
B) price-to-earnings ratio
C) price-to-book ratio
D) enterprise value-to-sales ratio
The cash conversion cycle measures how long it takes for a company to convert its investments in inventory into cash.
A) cash flow cycle
B) operating cycle
C) cash conversion cycle
D) working capital cycle
A high asset turnover ratio suggests that the company is efficiently using its assets to generate revenue.
A) inventory turnover ratio
B) fixed asset turnover ratio
C) asset turnover ratio
D) accounts receivable turnover ratio
The times interest earned ratio indicates a company’s ability to meet its debt obligations.
A) debt service coverage ratio
B) interest coverage ratio
C) times interest earned ratio
D) fixed charge coverage ratio
A decreasing profit margin over time may indicate increasing competition or rising costs.
A) increasing profit margin
B) stable profit margin
C) decreasing profit margin
D) fluctuating profit margin
The working capital ratio is calculated by dividing current assets by current liabilities.
A) current ratio
B) quick ratio
C) cash ratio
D) working capital ratio
A high debt-to-assets ratio may indicate that a company has aggressive leverage with high risk.
A) equity-to-assets ratio
B) debt-to-equity ratio
C) debt-to-assets ratio
D) long-term debt ratio
The price-to-sales ratio can be useful when comparing companies within the same industry.
A) price-to-earnings ratio
B) price-to-book ratio
C) price-to-sales ratio
D) enterprise value-to-sales ratio
A low inventory turnover ratio might suggest overstocking or obsolescence.
A) accounts receivable turnover
B) inventory turnover ratio
C) asset turnover ratio
D) fixed asset turnover ratio
The operating cash flow ratio measures how well current liabilities are covered by the cash flow generated from operations.
A) cash flow coverage ratio
B) operating cash flow ratio
C) free cash flow ratio
D) cash flow to debt ratio
A high accounts payable turnover ratio indicates that the company pays its suppliers quickly.
A) accounts receivable turnover
B) inventory turnover
C) accounts payable turnover
D) asset turnover
The fixed asset turnover ratio measures how efficiently a company uses its fixed assets to generate sales.
A) total asset turnover
B) inventory turnover
C) fixed asset turnover ratio
D) working capital turnover
A low return on invested capital might suggest that the company is not allocating its capital efficiently.
A) return on equity
B) return on assets
C) return on invested capital
D) return on capital employed
The gross margin ratio is an indicator of a company’s financial health and business model.
A) net profit margin
B) operating margin
C) gross margin ratio
D) profit margin
A high debt service coverage ratio indicates that a company has sufficient income to pay its debt obligations.
A) interest coverage ratio
B) debt service coverage ratio
C) times interest earned ratio
D) fixed charge coverage ratio
The enterprise value-to-EBITDA ratio is often used in valuing potential takeover targets.
A) price-to-earnings ratio
B) price-to-book ratio
C) enterprise value-to-EBITDA ratio
D) price-to-sales ratio
A declining asset turnover ratio may indicate that a company is over-investing in assets.
A) increasing asset turnover
B) stable asset turnover
C) declining asset turnover ratio
D) fluctuating asset turnover
The cash ratio is the most conservative liquidity ratio as it only considers cash and cash equivalents.
A) current ratio
B) quick ratio
C) cash ratio
D) working capital ratio
Interpreting Financial Ratios in Business Reports
Part 2: Text Completion
Text 1: Understanding Liquidity Ratios
Liquidity ratios are crucial indicators of a company’s financial health. These ratios measure a company’s ability to pay off its short-term debts and obligations. The most common liquidity ratios are the current ratio, quick ratio, and cash ratio.
The current ratio is calculated by dividing current assets by current liabilities. A ratio of 2:1 is generally considered good, meaning the company has twice as many assets as liabilities. However, (31) __ can vary depending on the industry.
(32) __ is more stringent than the current ratio. It excludes inventory from current assets, as inventory can be difficult to quickly convert to cash. A quick ratio of 1:1 or higher is typically considered good.
The cash ratio is the most conservative of the liquidity ratios, as it only considers cash and cash equivalents. While a high cash ratio indicates strong liquidity, (33) __, as it may suggest that the company is not efficiently using its assets.
When interpreting these ratios, it’s important to consider the company’s industry and compare the ratios to those of similar companies. Additionally, (34) __ can provide valuable insights into the company’s financial trends.
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A) acceptable ratios
B) current assets
C) quick ratios
D) cash equivalents -
A) The quick ratio
B) The current ratio
C) The cash ratio
D) The working capital ratio -
A) it’s not always ideal
B) it’s always preferable
C) it’s rarely important
D) it’s consistently neutral -
A) ignoring historical data
B) focusing on a single year
C) analyzing trends over time
D) disregarding industry standards
Text 2: Profitability Ratios
Profitability ratios are essential tools for assessing a company’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholders’ equity. These ratios provide insights into the company’s operational efficiency and pricing strategies.
One of the most commonly used profitability ratios is the gross profit margin. This ratio is calculated by dividing gross profit by total revenue. A higher gross profit margin indicates that (35) __, which can lead to higher overall profitability.
The operating profit margin, also known as the EBIT (Earnings Before Interest and Taxes) margin, measures the percentage of profit a company generates from its operations. This ratio is calculated by dividing operating profit by total revenue. (36) __ as it excludes the effects of financing and accounting decisions.
Return on Assets (ROA) and Return on Equity (ROE) are two important ratios that measure how efficiently a company uses its assets and equity to generate profits. ROA is calculated by dividing net income by total assets, while ROE is calculated by dividing net income by shareholders’ equity. (37) __, but it’s important to consider the company’s debt levels when interpreting ROE.
When analyzing profitability ratios, it’s crucial to compare them with industry averages and historical trends. (38) __, as they can be influenced by various factors such as industry trends, economic conditions, and company-specific events.
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A) the company is less efficient
B) the company retains more revenue as profit
C) the company has higher operating costs
D) the company is losing market share -
A) This ratio is less important than gross profit margin
B) This ratio is difficult to calculate accurately
C) This ratio provides a clearer picture of operational efficiency
D) This ratio is only relevant for manufacturing companies -
A) A higher ROE is generally considered better
B) A lower ROA is always preferable
C) ROE and ROA are always equal
D) Neither ROE nor ROA are important metrics -
A) It’s best to ignore short-term fluctuations
B) Only the most recent year’s ratios matter
C) Ratios from five years ago are the most relevant
D) Profitability ratios are always stable over time
Text 3: Efficiency Ratios
Efficiency ratios, also known as activity ratios, measure how well a company utilizes its assets and manages its liabilities. These ratios are crucial for understanding a company’s operational performance and can provide insights into its management effectiveness.
One key efficiency ratio is the inventory turnover ratio, which measures how many times a company’s inventory is sold and replaced over a period. (39) __, as it indicates that the company is efficiently managing its inventory and not tying up excess capital in unsold goods.
The accounts receivable turnover ratio is another important metric. It measures how quickly a company collects payment on its credit sales. A higher ratio suggests that the company is (40) __, which is generally positive for cash flow.
Asset turnover ratio is a comprehensive measure of how efficiently a company uses all of its assets to generate sales. It’s calculated by dividing total sales by average total assets. (41) __, but this can vary significantly between industries.
When interpreting efficiency ratios, it’s essential to consider the company’s business model and industry norms. For example, (42) __, while a software company might have a much higher ratio due to its asset-light business model.
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A) A lower ratio is generally better
B) A higher ratio is generally better
C) The ratio should always be exactly 1
D) The ratio is irrelevant for most businesses -
A) struggling to collect payments
B) offering overly generous credit terms
C) efficiently collecting its receivables
D) likely to face cash flow problems -
A) A higher ratio typically indicates better efficiency
B) A lower ratio always indicates better management
C) The ratio should remain constant year over year
D) This ratio is not important for investors -
A) all companies should have the same asset turnover ratio
B) a manufacturing company might have a lower asset turnover ratio
C) efficiency ratios are only relevant for tech companies
D) retailers typically have the lowest efficiency ratios
Text 4: Leverage Ratios
Leverage ratios are crucial financial metrics that provide insight into a company’s capital structure and its ability to meet financial obligations. These ratios help investors and analysts understand the extent to which a company is using debt to finance its operations and assets.
The debt-to-equity ratio is one of the most commonly used leverage ratios. It compares a company’s total debt to its shareholders’ equity. (43) __, but it’s important to note that the ideal ratio can vary by industry. Some industries, such as utilities, typically have higher debt-to-equity ratios due to their capital-intensive nature.
Another important leverage ratio is the interest coverage ratio, also known as the times interest earned ratio. This ratio measures (44) __. A higher ratio indicates that the company has a better ability to cover its interest expenses, which is generally seen as positive by creditors and investors.
The debt-to-assets ratio is also a key metric in assessing a company’s leverage. It shows the percentage of a company’s assets that are financed by debt. (45) __, as it could indicate that the company is at higher risk of default.
When analyzing leverage ratios, it’s crucial to consider them in the context of the company’s industry, growth stage, and overall financial health. (46) __, as they can provide a more comprehensive view of the company’s financial risk and stability.
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A) A higher ratio indicates lower financial leverage
B) A lower ratio indicates higher financial leverage
C) The ratio should always be exactly 1:1
D) This ratio is not relevant for most businesses -
A) how many times a company’s operating profit can cover its interest expenses
B) the total amount of debt a company has
C) the company’s total assets
D) how quickly a company can pay off all its debts -
A) A very low debt-to-assets ratio is always ideal
B) A high debt-to-assets ratio is generally considered risky
C) The debt-to-assets ratio should always be zero
D) This ratio is only relevant for banks and financial institutions -
A) It’s best to look at leverage ratios in isolation
B) Only the debt-to-equity ratio matters
C) Leverage ratios should be considered alongside other financial metrics
D) Leverage ratios are not important for most investors
Analyzing Business Performance with Financial Ratios
Answer Key
Part 1: Incomplete Sentences
- B) liquidity
- A) debt-to-equity
- C) price-to-earnings
- C) gross profit margin
- D) return on assets
- B) current ratio
- A) inventory turnover ratio
- C) operating margin
- D) accounts receivable turnover
- C) quick ratio
- C) return on equity
- D) dividend payout ratio
- C) price-to-book ratio
- C) cash conversion cycle
- C) asset turnover ratio
- C) times interest earned ratio
- C) decreasing profit margin
- A) current ratio
- C) debt-to-assets ratio
- C) price-to-sales ratio
- B) inventory turnover ratio
- B) operating cash flow ratio
- C) accounts payable turnover
- C) fixed asset turnover ratio
- C) return on invested capital
- C) gross margin ratio
- B) debt service coverage ratio
- C) enterprise value-to-EBITDA ratio
- C) declining asset turnover ratio
- C) cash ratio
Part 2: Text Completion
Text 1:
31. A) acceptable ratios
32.
