Financial Ratios (Income Statement) Quiz

How is operating margin calculated?

• Dividing operating income by net sales

• Subtracting COGS from net sales

• Adding variable costs to total revenue

• Multiplying net income by gross margin

Why is earnings per share (EPS) considered crucial for investors?

• It shows how much dividend shareholders will receive

• A higher EPS indicates higher profits

• Lower EPS means more value for investors

• It determines the market value per share

How is gross margin calculated?

• Dividing net income by operating expenses

• Subtracting COGS from net sales

• Dividing COGS by net profit

• Adding operating expenses to total revenue

What does gross margin represent for a company?

• Percentage of net income available for profit

• Amount of revenue kept after incurring cost of goods sold

• Percentage of dividends paid to shareholders

• Number of shares outstanding

How can you calculate profit margin?

• Divide net income after tax by net sales

• Subtract operating income from net sales

• Multiply net profit by gross margin

• Add expenses to total revenue

What does operating margin show for a company?

• Percentage of revenue reinvested in the business

• How well return on sales is being managed

• Total profit generated for each dollar of sale

• Net income divided by total assets

What is earnings per share (EPS) used to calculate?

• Ratio of net income to total sales

• Price multiple of a company's stock

• Return on investment for shareholders

• Profit per share available to investors

What does profit margin indicate for a business?

• Percentage of net income available for reinvestment

• Profit per sale after deducting all expenses

• Amount of revenue left after paying variable costs

• Net income divided by total assets

How is a high P/E ratio generally interpreted by investors?

• Stock price is low relative to earnings

• Share price is overvalued relative to earnings

• Investors need to pay less for each dollar of earnings

• Company's market value is decreasing

What is the price-earnings (P/E) ratio used to calculate?

• Market value per share divided by earnings per share

• Net income after tax divided by total assets

• Gross profit divided by net sales

• Operating income divided by variable costs