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Explain how financial ratio analysis helps financial managers assess the health of a company.
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What are ratios used to compare?
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Analysis Financials
Analysis of Finacial Statements
| Question | Answer |
|---|---|
| Explain how financial ratio analysis helps financial managers assess the health of a company. | Financial ratios are numbers that express the value of 1 financial variable relative 2 another. They are comparative measures because they show relative value and allow financial analysts to compare information that could not be compared in its raw form. |
| What are ratios used to compare? | One ratio to a related ratio The firm's performance to management's goals The firm's past and present performance The firm's performance to that of similar firms. |
| What do profitability ratios measure? | Profitability ratios measure how much company revenue is eaten up by expenses, how much a company earns relative to sales generated, and the amount earned relative to the value of the firm's assets and equity. |
| What do liquidity ratios measure? | Liquidity Ratios measure the ability of a firm to meet its short-term obligations. |
| How do you calculate gross profit margin? (This is a Profitability Ratio) | Gross Profit Margin = Gross Profit / Sales |
| How do you calculate operating profit margin? (This is a Profitability Ratio) | Operating Profit Margin = Earnings before Interest and Taxes / Sales |
| How do you calculate net profit margin? (This is a Profitability Ratio) | Net Profit Margin = Earnings Available to Common Stockholders / Sales |
| How do you calculate return on assets? (This is a Profitability Ratio) | Return on Assets = Earnings Available to Common Stockholders / Total Assets |
| How do you calculate return on equity? (This is a Profitability Ratio) | Return on Equity = Earnings Available to Common Stockholders / Common Equity |
| How do you calculate the current ratio? (This is a Liquidity Ratio) | Current Ratio = Current Assets / Current Liabilities |
| How do you calculate the quick ratio? (This is a Liquidity Ratio) | Quick Ratio = Current Assets Less Inventory / Current Liabilities |
| What are debt ratios? | Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt. |
| How do you calculate the debt to total assets? (This is a Debt Ratio) | Debt to Total Assets = Total Debt / Total Assets |
| How do you calculate the debt to equity? (This is a Debt Ratio) | Debt to Equity = Total Debt / Equity |
| How do you calculate times interest earned? (This is a Debt Ratio) | Times Interest Earned = EBIT / Interest Expense |
| What do asset activity ratios measure? | Asset Activity Ratios measure how efficiently a firm uses its assets. |
| How do you calculate the average collection period? (This is an Asset Activity Ratio) | Average Collection Period = Accounts Receivable / Average Daily Credit Sales |
| How do you calculate inventory turnover? (This is an Asset Activity Ratio) | Inventory Turnover = Sales / Inventory |
| How do you calculate total asset turnover? (This is an Asset Activity Ratio) | Total Asset Turnover = Sales / Total Assets |
| What do market value ratios measure? | Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price. |
| How do you calculate P/E? (This is a Market Value Ratio) | P/E = Market Price per Share / Earnings per Share |
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