Financial Ratios Quiz

Which of the following ratios primarily indicates a company's ability to pay off its short-term liabilities with its most liquid assets?

• Return on Equity (ROE)

• Gross Profit Margin

• Debt-to-Equity Ratio

• Current Ratio

If a company has a Quick Ratio of 0.8, which of the following could be true?

• The company's inventory turnover is high.

• The company may face liquidity issues, as it has less than $1 in liquid assets for every $1 of short-term liabilities.

• The company has sufficient liquid assets to cover all short-term liabilities.

• The company has a very high degree of liquidity.

A company's Return on Equity (ROE) is 15%, and its Return on Assets (ROA) is 5%. Which of the following conclusions can be drawn from this information?

• The company is not generating enough profit.

• The company's equity base is too large.

• The company is likely using high financial leverage.

• The company has low financial leverage.

Which ratio would best indicate the efficiency of a company's inventory management?

• Gross Profit Margin

• Debt-to-Equity Ratio

• Quick Ratio

• Inventory Turnover Ratio

Which of the following would likely lead to a higher-quality earnings report?

• Aggressive recognition of revenue on future sales.

• Reduced cash flow from operations.

• Significant increase in accounts receivable.

• High correlation between net income and cash flow from operations.

Which of the following is most likely to cause a company's Price-to-Earnings (P/E) ratio to increase, assuming no changes in net income?

• Increase in share price.

• Increase in number of outstanding shares.

• Increase in cash flow from operations.

• Decrease in revenue.

If a company's Debt-to-Equity ratio is 2.0, which of the following is true?

• The company has minimal debt relative to its equity.

• The company has an equal balance of debt and equity.

• The company has low leverage, relying mainly on equity.

• The company is highly leveraged, with twice as much debt as equity.

Which statement about cash flow is true?

• High cash flow from investing activities indicates strong operational performance.

• A company with high net income and low cash flow from operations may have poor quality earnings.

• Positive operating cash flow always means a company is profitable.

• Financing cash flow should always be negative for a healthy company.

A company with a high Interest Coverage Ratio and a high Debt-to-Equity Ratio likely has:

• Excessive liquidity concerns.

• High interest expense and low profit.

• Strong ability to cover interest despite high debt levels.

• Low debt and weak profitability.

Which of the following ratios would be most useful for comparing profitability across companies with different capital structures?

• Return on Equity (ROE)

• Net Profit Margin

• Gross Profit Margin

• Operating Profit Margin