17.2 Ratio analysis

• Match the ratio type with its definition:

  Profitability Ratios ↔️ Measure ability to generate profits

  Liquidity Ratios ↔️ Measure ability to meet short-term obligations

  Solvency Ratios ↔️ Measure ability to meet long-term obligations

  Efficiency Ratios ↔️ Measure effectiveness of asset use
• The current ratio is used to measure a company's ability to meet short-term obligations.
• What does the inventory turnover ratio measure?

  Effectiveness of inventory management
• Liquidity ratios measure a company's ability to meet long-term obligations.

  False
• The gross profit margin measures profitability after deducting the cost of goods sold
• The gross profit margin is calculated by dividing gross profit by revenue
• Match the ratio with its purpose:

  Profitability ratios ↔️ Measure ability to generate profits

  Liquidity ratios ↔️ Measure ability to meet short-term obligations

  Solvency ratios ↔️ Measure ability to meet long-term obligations

  Efficiency ratios ↔️ Measure effective use of resources
• Ratio analysis allows for a more in-depth evaluation of financial health compared to raw financial statements.


  True
• The gross profit margin indicates efficiency in producing goods and services
• Match the liquidity ratio with its purpose:

  Current ratio ↔️ Measures ability to cover current liabilities

  Acid test ratio ↔️ Excludes inventory for conservative assessment

  Working capital ↔️ Indicates excess of current assets over liabilities
• The acid test ratio provides a more conservative assessment than the current ratio.


  True
• A higher times interest earned ratio indicates greater solvency.

  True
• Profitability ratios measure a company's ability to generate profits
• Liquidity ratios measure a company's ability to meet short-term obligations.

  True
• What does the debt-to-equity ratio measure?

  Long-term debt vs equity
• Name three key profitability ratios.

  Gross Profit Margin, Net Profit Margin, Return on Equity
• Return on Equity (ROE) measures how effectively shareholders' investments generate profit.

  True
• Order the steps to calculate the current ratio:

  1️⃣ Identify current assets

  2️⃣ Identify current liabilities

  3️⃣ Divide current assets by current liabilities
• Positive working capital indicates healthy financial health
• What is the formula for the debt-to-equity ratio?

  Total Liabilities / Shareholders' Equity
• What does the inventory turnover ratio measure?

  How often inventory is sold
• Efficiency ratios provide insights into a company's operational efficiency and cash flow management.

  True
• The Net Profit Margin measures the percentage of revenue remaining after deducting all expenses
• What does the Return on Equity (ROE) indicate?

  Profitability from shareholders' equity
• The Gross Profit Margin is calculated as (Gross Profit / Revenue) x 100
• The Return on Equity (ROE) measures the company's profitability from shareholders' equity
• What does positive working capital indicate?

  Healthy financial health
• What is the formula for the Net Profit Margin?

  (Net Income / Revenue) x 100
• The Times Interest Earned (TIE) is calculated as EBIT / Interest Expense
• The Inventory Turnover Ratio is calculated as Cost of Goods Sold / Average Inventory
• The purpose of ratio analysis is to provide insights into a company's financial position and performance
• Match the ratio type with its formula:

  Liquidity Ratio ↔️ Current Assets / Current Liabilities

  Solvency Ratio ↔️ Total Liabilities / Shareholders' Equity

  Efficiency Ratio ↔️ Cost of Goods Sold / Average Inventory
• Profitability ratios measure a company's ability to generate profits
• Match the solvency ratio with its formula:

  Debt-to-Equity Ratio ↔️ Total Liabilities / Shareholders' Equity

  Times Interest Earned ↔️ EBIT / Interest Expense
• What is the formula for Net Profit Margin?

  (Net Income / Revenue) x 100
• A higher Debt-to-Equity Ratio indicates a company's greater reliance on debt
• Match the profitability ratio with its definition:

  Gross Profit Margin ↔️ Revenue after cost of goods sold

  Net Profit Margin ↔️ Overall profitability after all costs

  Return on Equity ↔️ Profitability from shareholders' equity
• What does a high Current Ratio indicate?

  Better liquidity
• Working Capital is the excess of current assets over current liabilities
• A higher Times Interest Earned (TIE) indicates a company's greater ability to cover interest expenses.


  True