Financial Ratios

What does Inventory Turnover measure?

• The number of times inventory is sold per year
• The time it takes to collect receivables
• The percentage of revenue reinvested
• The ability to cover interest payments

Why does the Quick Ratio exclude inventory?

• Inventory may take time to sell and convert into cash
• Inventory is not considered a liability
• It is difficult to measure inventory accurately
• Inventory is irrelevant to liquidity

What does the Gross Profit Margin measure?

• Profit per employee
• Profitability at the product/service level
• The amount of cash available for debt payments
• The efficiency of inventory turnover

Why are financial ratios important?

• They provide absolute financial values
• They measure various financial characteristics of a company
• They replace income statements and balance sheets
• They only apply to small businesses

Which group primarily uses the DSCR to evaluate a company?

• Investors
• Competitors
• Banks and lenders
• Government regulators

Why is a higher Return on Assets (ROA) considered better?

• It means the company is earning more money with less investment
• It shows the company has high liabilities
• It indicates that the company is taking on more debt
• It demonstrates that the company is not reinvesting profits

What happens when a company reaches its break-even point?

• The company has achieved maximum profit
• The company has no expenses
• Total revenue equals total costs
• The company is operating at a loss

The Interest Coverage Ratio helps determine:

• The ability to cover principal loan payments
• How much debt is being used relative to assets
• The ability to cover interest payments with operating profit
• The percentage of revenue reinvested

The formula for Days Sales Outstanding (DSO) is:

• (Ending accounts receivables) / revenue per day
• Total liabilities / total assets
• Gross profit / total revenue
• Net profit / operating expenses

A low Debt-to-Equity Ratio indicates:

• High leverage
• Low financial risk
• High profitability
• Poor liquidity