8.1 Ratio analysis

• Liquidity ratios measure a company's ability to generate profits.

  False
• Gearing ratios measure a company's level of debt financing
• Liquidity ratios measure a company's ability to generate profits.

  False
• Match the ratio category with its purpose:

  Liquidity Ratios ↔️ Meet short-term obligations

  Profitability Ratios ↔️ Generate profits

  Efficiency Ratios ↔️ Use assets effectively

  Gearing/Leverage Ratios ↔️ Measure debt financing
• The current ratio measures a company's ability to meet short-term obligations.


  True
• The debt-to-equity ratio assesses debt compared to equity
• The gross profit margin is calculated using gross profit and revenue
• Match the ratio type with its interpretation:

  Liquidity Ratios ↔️ Ability to meet short-term obligations

  Profitability Ratios ↔️ Ability to generate profits

  Efficiency Ratios ↔️ Effectiveness of asset use

  Gearing/Leverage Ratios ↔️ Level of debt financing
• Efficiency ratios evaluate how effectively a company uses its assets
• Gearing ratios indicate the company's level of debt financing
• Match the ratio type with its purpose:

  Liquidity Ratios ↔️ Meet short-term obligations

  Profitability Ratios ↔️ Generate profits

  Efficiency Ratios ↔️ Optimize asset use

  Gearing Ratios ↔️ Determine debt level
• Profitability ratios measure the company's ability to generate profits
• Steps in the ratio analysis process:

  1️⃣ Calculate financial ratios

  2️⃣ Interpret the ratios

  3️⃣ Assess company performance
• Match the ratio category with its purpose:

  Liquidity ↔️ Meet short-term obligations

  Profitability ↔️ Generate profits

  Efficiency ↔️ Evaluate asset usage

  Gearing/Leverage ↔️ Determine debt level
• What do profitability ratios measure?

  Ability to generate profits
• Efficiency ratios measure how effectively a company is using its assets
• Match the ratio category with its purpose:

  Liquidity Ratios ↔️ Meet short-term obligations

  Profitability Ratios ↔️ Generate profits

  Efficiency Ratios ↔️ Measure asset effectiveness

  Gearing/Leverage Ratios ↔️ Determine debt financing
• The quick ratio measures a company's ability to cover immediate liabilities
• Match the ratio with its formula and purpose:

  Current Ratio ↔️ Current Assets / Current Liabilities - Measures short-term obligations

  Gross Profit Margin ↔️ (Gross Profit / Revenue) x 100 - Assesses profit after cost of sales

  Debt-to-Equity Ratio ↔️ Total Debt / Total Equity - Assesses debt compared to equity
• The net profit margin is calculated using net profit and revenue
• Steps in interpreting and evaluating ratios:

  1️⃣ Calculate financial ratios

  2️⃣ Analyze the calculated ratios

  3️⃣ Draw insights about company performance
• Interpreting and evaluating ratios involves analyzing financial ratios to draw insights about a company's performance and financial position
• What do profitability ratios measure?

  Ability to generate profits
• Gearing ratios indicate the company's level of debt financing.


  True
• Comparing ratios over time allows you to analyze trends in a company's performance
• What does a decreasing current ratio over time indicate?

  Worsening liquidity
• Ratio analysis is used to assess a company's performance and financial position.performance
• Match the ratio type with its purpose:

  Liquidity Ratios ↔️ Meet short-term obligations

  Profitability Ratios ↔️ Generate profits

  Efficiency Ratios ↔️ Use assets effectively

  Gearing/Leverage Ratios ↔️ Measure debt financing
• Ratio analysis examines relationships between financial statement items
• Profitability ratios assess a company's ability to generate profits
• Arrange the following ratios by their category:

  1️⃣ Current Ratio

  2️⃣ Gross Profit Margin

  3️⃣ Inventory Turnover

  4️⃣ Debt-to-Equity Ratio
• The gross profit margin assesses profit after the cost of sales
• The current ratio is calculated using current assets and current liabilities.


  True
• The inventory turnover formula uses cost of goods sold and average inventory.


  True
• A high liquidity ratio indicates a company's strong ability to meet its short-term obligations.

  True
• What do efficiency ratios evaluate in a company?

  Use of assets
• Financial ratios can inform business strategies and decisions.


  True
• What do liquidity ratios assess?

  Short-term obligations
• Ratio analysis helps analyze relationships between financial statement items.


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