What is the primary purpose of financial ratio analysis?

To evaluate a business's financial position, performance, and future outlook by comparing key financial information from financial statements.

Fill in the blank: The _____ ratio compares a company's net income to its net revenue, indicating profitability per dollar of sales.

Net profit margin

What are liquidity ratios primarily used to assess?

The ability of a business to convert its assets to cash and meet short-term obligations.

True or False: Profitability ratios are used to measure a company's ability to pay off its long-term obligations.

False. Profitability ratios measure a company’s ability to generate profit from its resources.

Which ratio indicates how many times a company can cover its interest payments with its earnings before interest and taxes?

Interest coverage ratio

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

It measures a company's ability to pay short-term liabilities with its short-term assets.

Riddle: I assess efficiency in managing inventory, my formula is cost of goods sold divided by average inventory. What am I?

Inventory turnover ratio

Fill in the blank: Solvency ratios evaluate a company’s ability to meet its _____ obligations.

Long-term

What is the role of coverage ratios in financial analysis?

To measure the risk associated with lending to a business by assessing its ability to cover fixed charges.

How do activity ratios provide insights into a company's operations?

They measure the efficiency of a company in managing its assets and converting them into sales.

True or False: The debt-to-equity ratio indicates the proportion of debt used to finance a company's assets relative to its equity.

True.

What does the quick ratio assess compared to the current ratio?

The quick ratio considers only the most liquid assets, excluding inventory, to provide a more stringent measure of liquidity.

Riddle: I compare a company’s stock price to its earnings per share, helping investors gauge value. What am I?

Price to earnings (P/E) ratio

Fill in the blank: The _____ ratio reveals how long a company can sustain its daily expenses using only its liquid assets.

Defensive interval

What limitation of ratio analysis is highlighted by the fact that financial statements provide historical information?

They do not reflect current conditions, making them less useful for predicting future performance.