What is the primary purpose of accounting ratios in financial analysis?

Accounting ratios analyze financial health.

• Highlight key performance metrics.

• Facilitate comparison with peers.

• Assist in identifying trends.

Fill in the blank: The gross profit ratio is calculated as ___ divided by net revenue of operations.

Gross profit

True or False: Ratio analysis can be misleading if the underlying financial data contains errors.

True

Explain the significance of the current ratio in assessing a company's financial health.

Current ratio indicates financial health.

• Measures ability to cover liabilities.

• A ratio above 2:1 is safe.

• Low ratio raises solvency concerns.

What do liquidity ratios assess in a business?

Liquidity ratios evaluate short-term stability.

• Assess cash flow health.

• Indicate financial risk level.

• Guide investment decisions.

Fill in the blank: The quick ratio excludes ___ from current assets to provide a conservative measure of liquidity.

Inventories

Identify one limitation of ratio analysis related to qualitative factors.

Ratio analysis overlooks qualitative factors.

• Ignores management effectiveness.

• Neglects market conditions.

• Disregards brand reputation.

True or False: A higher debt-equity ratio indicates a lower risk for creditors.

False. A higher debt-equity ratio indicates higher financial risk for creditors.

How does the interest coverage ratio provide insight into a company's financial stability?

Interest coverage ratio shows financial stability.

• Indicates debt repayment ability.

• Higher ratios imply lower risk.

• Essential for investor confidence.

Fill in the blank: The inventory turnover ratio indicates how many times a company's inventory is converted into ___ during a specific period.

Revenue from operations

What is the role of profitability ratios in financial analysis?

Profitability Ratios Indicate Financial Health

• Measure earnings efficiency.

• Guide investment decisions.

• Highlight operational performance.

True or False: A low inventory turnover ratio is always indicative of effective inventory management.

False. A low inventory turnover ratio may signal poor inventory management or obsolete stock.

Define the debt to capital employed ratio and its significance.

Debt to capital employed ratio: definition

• Measures debt vs. total capital.

• Indicates financial leverage used.

• Lower ratio means less risk.

Fill in the blank: The proprietary ratio reflects the proportion of owners' equity in relation to ___ of the company.

Total assets

What does the net profit ratio indicate about a business's efficiency?

Net profit ratio shows business efficiency.

• Indicates profitability after expenses.

• Reflects overall financial health.

• Crucial for investment decisions.

True or False: Activity ratios measure how effectively a company's assets are utilized in generating sales.

True

Explain the importance of cross-sectional analysis in ratio analysis.

Cross-sectional analysis compares financial ratios.

• Identifies industry benchmarks quickly.

• Highlights competitive strengths effectively.

• Reveals weaknesses in performance clearly.

Fill in the blank: The return on capital employed ratio assesses how well a business is using its ___ to generate profits.

Funds

What is the primary purpose of accounting ratios in financial analysis?

Accounting ratios analyze financial health.

• Evaluate performance trends.

• Facilitate comparisons with peers.

• Aid in investment decisions.

Fill in the blank: A high current ratio (above 2:1) may indicate ___ in current assets, suggesting possible mismanagement.

Excessive investment

True or False: The current ratio is a measure of a company's ability to meet long-term obligations.

False. The current ratio measures short-term solvency by comparing current assets to current liabilities.

Explain the significance of the debt-equity ratio in financial analysis.

Debt-equity ratio shows financial health.

• Indicates financial leverage used.

• Lower ratio shows less risk.

• Higher ratio signals potential issues.

Fill in the blank: The gross profit ratio reflects the percentage of ___ compared to revenue from operations.

Gross profit

What does the interest coverage ratio indicate?

Interest coverage ratio indicates debt payment ability.

• Measures financial health effectively.

• Higher ratio signals less risk.

• Influences investor confidence significantly.

True or False: Ratio analysis can be effectively conducted without considering the accuracy of the underlying financial data.

False

Accuracy is crucial for ratio analysis.

• Inaccurate data skews results.

• Reliability ensures valid insights.

• Financial decisions depend on accuracy.

What is meant by liquidity ratios, and which two are the most commonly used?

Liquidity ratios measure financial health.

• Indicate short-term financial stability.

• Current ratio shows asset coverage.

• Quick ratio excludes inventory value.

How does the inventory turnover ratio provide insights into a company's operational efficiency?

Inventory turnover indicates efficiency.

• Measures sales frequency.

• Higher ratio shows strong performance.

• Lower ratio indicates potential issues.