3.3 Ratio Analysis

• Ratio analysis is a technique used to evaluate a company's financial performance.
• Match the ratio type with its purpose:

  Profitability ↔️ Evaluate profitability

  Liquidity ↔️ Assess short-term solvency

  Solvency ↔️ Measure long-term financial health

  Efficiency ↔️ Assess asset utilization
• A Gross Profit Margin of 40% indicates that 40% of the revenue remains after deducting the cost of goods sold.
• Profitability ratios measure a company's profit-generating ability.
• Liquidity ratios assess a company's short-term financial solvency.
• Solvency ratios evaluate a company's long-term financial health.
• Efficiency ratios measure how well a company utilizes its assets.
• A Net Profit Margin of 15% means the company earns $0.15 in profit for every dollar of revenue.
• Match the profitability ratio with its interpretation:

  Gross Profit Margin ↔️ Revenue after deducting cost of goods sold

  Net Profit Margin ↔️ Revenue remaining as net profit

  Return on Equity ↔️ Effectiveness of shareholders' equity
• What does the Gross Profit Margin indicate after deducting the cost of goods sold?

  Revenue percentage remaining
• The Net Profit Margin measures the percentage of revenue that remains as net profit after all expenses
• The Return on Equity (ROE) shows how effectively a company uses shareholders' equity to generate profits.
• What is the Gross Profit Margin if a company has a Gross Profit of $500,000 and Revenue of $1,000,000?

  50%
• The Current Ratio measures a company's ability to pay its current liabilities with current assets
• What does the Quick Ratio exclude to provide a more conservative measure of liquidity?

  Inventory
• The Cash Ratio focuses on cash and highly liquid assets to assess short-term solvency.
• What is the Current Ratio if a company has Current Assets of $800,000 and Current Liabilities of $400,000?

  2
• Ratio analysis is used to evaluate a company's financial performance by comparing different financial statement items
• What are the four main types of ratios used in ratio analysis?

  Profitability, liquidity, solvency, efficiency
• Match the ratio type with its formula and use:

  Profitability ↔️ $\frac{Gross\:Profit}{Revenue} \times 100$ ||| Evaluate profitability

  Liquidity ↔️ $\frac{Current\:Assets}{Current\:Liabilities}$ ||| Assess short-term solvency

  Solvency ↔️ $\frac{Total\:Debt}{Total\:Equity}$ ||| Measure long-term financial health
• Arrange the following ratios in order of what they primarily evaluate:

  1️⃣ Profitability

  2️⃣ Liquidity

  3️⃣ Solvency
• The Gross Profit Margin is a key ratio used to evaluate a company's profitability
• Which ratio is used to assess a company's short-term solvency?

  Current Ratio
• The Debt-to-Equity Ratio measures a company's long-term financial health.
• Ratio analysis is used to evaluate a company's financial performance
• What is the formula for the Profitability ratio?

  $\frac{Gross\:Profit}{Revenue} \times 100$
• The Liquidity ratio assesses a company's short-term solvency.
• The Solvency ratio measures a company's long-term financial health
• What does the Profitability ratio evaluate?

  Profit-generating ability
• Main types of financial ratios

  1️⃣ Profitability

  2️⃣ Liquidity

  3️⃣ Solvency

  4️⃣ Efficiency
• Match the ratio type with its purpose:

  Profitability ratios ↔️ Measure profit-generating ability

  Liquidity ratios ↔️ Assess short-term solvency

  Solvency ratios ↔️ Evaluate long-term financial health

  Efficiency ratios ↔️ Measure asset utilization
• A Net Profit Margin of 15% means the company earns $0.15 in profit for every dollar of revenue.
• Profitability ratios measure a company's ability to generate profits
• What does the Gross Profit Margin indicate?

  Revenue after COGS
• The Net Profit Margin measures the percentage of revenue remaining as net profit after all expenses are paid.
• What does Return on Equity (ROE) show?

  Effective use of equity
• A Gross Profit of $500,000 and Revenue of $1,000,000 results in a Gross Profit Margin of 50
• What does the Current Ratio measure?

  Ability to pay liabilities
• Match the liquidity ratio with its formula:

  Current Ratio ↔️ $\frac{Current\:Assets}{Current\:Liabilities}$

  Quick Ratio ↔️ $\frac{Current\:Assets\: - \:Inventory}{Current\:Liabilities}$

  Cash Ratio ↔️ $\frac{Cash\: + \:Marketable\:Securities}{Current\:Liabilities}$
• If Current Assets are $800,000 and Current Liabilities are $400,000, the Current Ratio is 2