3.7.2 Analysing the existing internal position of a business to assess strengths and weaknesses: financial ratio analysis

• Match the ratio type with its purpose:

  Liquidity Ratios ↔️ Meet short-term obligations

  Profitability Ratios ↔️ Assess ability to generate profits

  Efficiency Ratios ↔️ Evaluate use of assets
• The Gross Profit Margin is a type of profitability ratio.


  True
• Match the ratio type with its purpose:

  Liquidity Ratios ↔️ Meet short-term obligations

  Profitability Ratios ↔️ Assess ability to generate profits

  Efficiency Ratios ↔️ Evaluate use of assets

  Solvency Ratios ↔️ Indicate long-term financial stability
• Financial ratios can be calculated using data from a company's balance sheet, income statement, and cash flow statement.

  True
• Financial ratios provide insights into a company's liquidity, profitability, efficiency, and solvency
• Examples of liquidity ratios include the Current Ratio and the Quick Ratio
• Two examples of liquidity ratios are the Current Ratio and the Quick Ratio
• The general formula for a ratio is: Relevant Financial Data / Comparison
• A current ratio above 1.0 generally indicates good short-term liquidity.

  True
• What is the primary purpose of financial ratio analysis?

  Assess financial performance
• What does financial ratio analysis enable businesses to identify?

  Strengths and weaknesses
• Steps in using financial ratios for strategic planning:

  1️⃣ Calculate financial ratios

  2️⃣ Interpret the ratios

  3️⃣ Identify strengths and weaknesses

  4️⃣ Develop strategic plans
• The general formula for calculating a ratio is: Ratio = Relevant Financial Data / Comparison Financial Data
• What is the general formula for calculating a ratio?

  Relevant Financial Data / Comparison Financial Data
• What does interpreting financial ratios involve?

  Analyzing their meaning and significance
• Financial ratios provide insights into a company's liquidity, profitability, efficiency, and solvency.


  True
• What financial documents are used to calculate key financial ratios?

  Balance sheet, income statement, and cash flow statement
• What do efficiency ratios evaluate?

  Effective use of assets
• What is the formula for the current ratio?

  Current Assets / Current Liabilities
• What is the primary purpose of interpreting financial ratios?

  Assess financial performance
• What might a gross profit margin below industry averages signal?

  Profitability issues
• What does a current ratio of 2.0 suggest about a company's short-term liquidity?

  Good short-term liquidity
• What does a debt-to-equity ratio of 0.75 indicate?

  Moderate level of leverage
• Match the ratio type with its interpretation:

  Liquidity Ratios ↔️ Assess ability to meet short-term obligations

  Profitability Ratios ↔️ Evaluate effectiveness in generating profits

  Efficiency Ratios ↔️ Assess use of assets and resources

  Solvency Ratios ↔️ Analyze long-term financial stability
• Financial ratio analysis allows businesses to identify their strengths and weaknesses
• What do liquidity ratios measure?

  Short-term obligations ability
• Solvency ratios indicate a company's long-term financial stability.

  True
• The gross profit margin is calculated as (Gross Profit / Revenue) × 100.


  True
• Match the ratio type with its interpretation:

  Liquidity Ratios ↔️ Ability to meet short-term obligations

  Profitability Ratios ↔️ Effectiveness in generating profits

  Efficiency Ratios ↔️ Effectiveness in using assets

  Solvency Ratios ↔️ Long-term financial stability
• A high debt-to-equity ratio may suggest excessive leverage
• A gross profit margin of 40% indicates the company is generating healthy profits
• A gross profit margin below industry averages may signal profitability issues
• What does a current ratio of 1.8 indicate about a company's liquidity?

  Good short-term liquidity
• Match the ratio type with its examples:

  Liquidity Ratios ↔️ Current Ratio, Quick Ratio

  Profitability Ratios ↔️ Gross Profit Margin, Net Profit Margin

  Efficiency Ratios ↔️ Asset Turnover, Inventory Turnover

  Solvency Ratios ↔️ Debt-to-Equity Ratio, Interest Coverage Ratio
• Profitability ratios assess a company's ability to generate profits
• The general formula for calculating financial ratios is: Ratio = Relevant Financial Data / Comparison Financial Data
• The asset turnover ratio is calculated as Revenue / Total Assets
• A current ratio above 1.0 generally indicates good short-term liquidity.


  True
• Steps to interpret financial ratios:

  1️⃣ Calculate the ratios

  2️⃣ Compare to industry benchmarks

  3️⃣ Analyze historical trends

  4️⃣ Assess strengths and weaknesses
• An asset turnover ratio of 0.67 suggests the company could be more efficient in using its assets.

  True