Understanding Ratio Analysis

What is the primary purpose of ratio analysis in evaluating a firm's financial performance?

• To evaluate a firm's financial performance and condition.

• To analyze market trends and consumer behavior.

• To determine the company's market share.

• To assess employee productivity and efficiency.

Why is ratio analysis important for stakeholders like investors and creditors?

• It helps them understand market trends.

• It allows them to evaluate a company's financial condition.

• It provides insights into employee performance.

• It predicts future stock prices.

Which of the following statements about ratio analysis is accurate?

• Ratio analysis is only useful for internal management.

• Ratio analysis only focuses on long-term financial performance.

• Ratio analysis can provide insights into a company's profitability, liquidity, efficiency, and solvency.

• Ratio analysis is not relevant for investors or creditors.

Which of the following is NOT one of the four primary categories of ratios used in ratio analysis?

• Profitability ratios

• Liquidity ratios

• Market ratios

• Efficiency ratios

What do profitability ratios measure in a company?

• The overall market value of the company.

• The ability to generate profit relative to revenue, assets, or equity.

• The efficiency of asset utilization.

• The ability to meet short-term obligations.

How is the Gross Profit Margin calculated?

• Gross Profit Margin = Revenue - Cost of Goods Sold

• Gross Profit Margin = Gross Profit / Revenue × 100

• Gross Profit Margin = Current Assets / Current Liabilities

• Gross Profit Margin = Net Income / Revenue

What does the Net Profit Margin indicate?

• The total profit generated from sales before expenses.

• The percentage of revenue that remains as profit after all expenses have been deducted.

• The ratio of total assets to total liabilities.

• The percentage of revenue that exceeds the cost of goods sold.

What do liquidity ratios assess in a company?

• The profitability of the company's investments.

• The long-term financial stability of the firm.

• The ability to meet short-term obligations.

• The efficiency of inventory management.

Which formula represents the Current Ratio?

• Current Ratio = Gross Profit / Operating Expenses

• Current Ratio = Current Assets / Current Liabilities

• Current Ratio = Total Assets / Total Liabilities

• Current Ratio = Net Income / Total Revenue

What is the role of efficiency ratios in financial analysis?

• To evaluate the liquidity of the company.

• To assess a company's ability to generate sales from its assets.

• To measure a company's profitability over time.

• To determine the company's solvency.