Understanding Ratio Analysis

What is ratio analysis?

• A technique for managing employee performance

• A strategy for marketing products

• A method for predicting stock prices

• Ratio analysis is a tool for evaluating a company's financial performance through the calculation of financial ratios.

Why is ratio analysis important for businesses?

• It provides a detailed analysis of market trends.

• It helps in increasing employee salaries.

• It is only useful for tax purposes.

• Ratio analysis is important for businesses as it evaluates financial health and aids in decision-making.

What are the main types of financial ratios?

• Liquidity ratios, profitability ratios, leverage ratios, efficiency ratios, market value ratios

• Currency ratios

• Tax ratios

• Investment ratios

How do you calculate the current ratio?

• Current Ratio = Current Assets / Current Liabilities

• Current Ratio = Total Assets / Total Liabilities

• Current Ratio = Current Liabilities / Current Assets

• Current Ratio = Current Assets + Current Liabilities

What does a high debt-to-equity ratio indicate?

• It shows that the company is not using any debt financing.

• It indicates higher financial risk due to reliance on debt financing.

• It indicates a strong financial position due to low debt.

• It suggests that the company has a high level of cash reserves.

What is the purpose of the price-to-earnings (P/E) ratio?

• The P/E ratio is used to calculate dividend yields.

• The P/E ratio helps investors assess a company's valuation and growth expectations.

• The P/E ratio measures a company's total revenue.

• The P/E ratio indicates a company's market share.

How can liquidity ratios affect a company's operations?

• Liquidity ratios are solely used for tax calculations.

• Liquidity ratios have no impact on employee morale.

• Liquidity ratios determine a company's long-term profitability.

• Liquidity ratios affect a company's operations by influencing its ability to meet short-term obligations and invest in growth opportunities.

What is the formula for calculating return on equity (ROE)?

• ROE = Operating Income / Total Revenue

• ROE = Total Assets / Total Liabilities

• ROE = Net Income / Shareholder's Equity

• ROE = Net Income / Total Assets

How do profitability ratios help in assessing a company's performance?

• Profitability ratios help assess a company's performance by indicating its ability to generate profit relative to revenue, assets, and equity.

• They indicate the company's total debt compared to its assets.

• They provide insights into a company's employee satisfaction levels.

• They measure a company's market share in its industry.

What is the significance of the quick ratio in financial analysis?

• The quick ratio is used to evaluate employee performance.

• The quick ratio measures a company's long-term profitability.

• The quick ratio indicates the total assets of a company.

• The quick ratio is significant as it assesses a company's short-term liquidity and financial health.