Which principle of ratio analysis means that ratios are open for analyst interpretation, are not
governed by rules, and allow creativity to work according to a particular company or asset?
✔✔Flexibility
Comparing a fi
...
Which principle of ratio analysis means that ratios are open for analyst interpretation, are not
governed by rules, and allow creativity to work according to a particular company or asset?
✔✔Flexibility
Comparing a firm's ratios across time. ✔✔Trend Analysis
Comparing a firm's financial ratios to other firms' ratios or industry averages. ✔✔Cross-sectional
Analysis
As an active investor, Maria is analyzing her portfolio to decide if there are any stocks she
should remove from her pool of financial securities. A company she has invested in, Quiet Flag
Industries, just released its annual report.
Which kind of method should Maria use to see if the company has improved? ✔✔Trend analysis
An investment analyst is concerned about a construction company's ability to sell its inventory to
meet current obligations, because much of the inventory (commercial buildings) it builds and
sells takes longer than a year to construct.Which ratio should this analyst use to consider the effect of the firm's inventory on the firm's
ability to meet current obligations? ✔✔Quick ratio
Why are ratios considered flexible? ✔✔Because they are not regulated and can be changed or
invented according to a firm's needs
Which statement below is an example of how ratios are used in the field of finance? ✔✔A firm's
ratios are compared with those of a benchmark peer group to determine the firm's relative
strength and performance.
How might calculating financial ratios help shareholders? ✔✔Ratios can be used to determine
whether a firm is maximizing shareholder wealth.
The firm Betsy's Books conducts a financial analysis using ratios to know how it is performing
in comparison to other similar firms. What is this process called? ✔✔Benchmarking
measure a firm's ability to meet short-term obligations without raising external capital.
✔✔Liquidity ratios(also called efficiency ratios) measure how well the company uses its assets to generate sales or
cash—the firm's operational efficiency and profitability. ✔✔Activity ratios
consider how the firm is financed. ✔✔Leverage ratios
Which action will increase the return on equity of a firm? ✔✔Increasing the asset usage
efficiency of the firm
Which type of ratio should be used to examine the cost efficiency of a firm's production?
✔✔Profitability
They are commonly used to directly judge how profitable the company is and how well
management is doing as they strive to maximize owner wealth. ✔✔Profitability ratios
are used to evaluate the current share price of a public firm's stock. ✔✔Market ratios
What type of ratio is used to assess a firm's ability to meet short-term obligations without raising
external capital? ✔✔Liquidity ratiosWhy are several different types of ratios used to analyze a firm ✔✔Because different types of
ratios are needed to get information about different parts of a firm
What do leverage ratios describe? ✔✔What proportions of equity and debt a firm uses to finance
its assets
A firm has paid off its short-term loans more quickly in the past couple of years. What might this
trend indicate about the firm's financial ratios? ✔✔Its liquidity ratio is increasing.
ratios are used to assess whether a stock or a firm is correctly valued ✔✔Both the market-tobook (M/B) and price-to-earnings (P/E)
What is the main difference between the current ratio and the quick ratio? ✔✔The current ratio
includes inventory in current assets, and the quick ratio does not.
Which type of ratio is a current ratio? ✔✔Liquidity
The firm Betsy's Books has a market-to-book ratio of 1.2. What does this tell you about the firm?
✔✔This firm is expected to grow in the future.What does the net margin measure? ✔✔The percent of revenue that is retained as profit for the
firm
is the percent of sales remaining after covering COGS and operating expenses. ✔✔the operating
margin
measures the percent of revenue remaining after the cost of the goods sold (COGS) have been
taken out of sales. ✔✔Gross margin
is a composition of the profitability, efficiency, and capital structure of a firm. ✔✔Return on
equity
helps analyze where changes in return on equity come from. ✔✔The DuPont framework
Which of these measures is a component of return on equity? ✔✔Net marginHow can the DuPont framework help a company assess its return on equity? ✔✔It allows the
company to determine how its abilities to generate profits, manage assets, and use financing
contribute to the return on equity.
Which action increases the return on equity of a firm if all else remains constant? ✔✔Increasing
debt financing
What is a component of the DuPont framework? ✔✔Return on assets
Another name for debt or liability ✔✔Leverage
Which actions, taken together, will certainly increase a firm's ROE? ✔✔Decreasing equity
financing and increasing net margin
What is one way that a firm can improve its return on equity? ✔✔Successfully cutting
production costs to boost net margin
Which action will increase the return on equity of a firm? ✔✔Increasing the asset usage
efficiency of the firmWhich ratio helps an analyst evaluate whether a company can cover its short-term obligations?
✔✔Current ratio
An investment analyst is concerned about a construction company's ability to sell its inventory to
meet current obligations, because much of the inventory (commercial buildings) it builds and
sells takes longer than a year to construct.
Which ratio should this analyst use to consider the effect of the firm's inventory on the firm's
ability to meet current obligations? ✔✔quick ratio
For what purpose are market ratios used? ✔✔To evaluate the current share price of a public
firm's stock
You are considering starting a new business to sell Widgets in your hometown. You can import
the Widgets at a low cost, and you hope to be able to sell them for significantly more. Which
ratio can help you calculate how much profit you will earn from the sale of each Widget?
(Assume you are only considering the cost of the Widget, not any other operating costs.)
✔✔Gross marginWhat allows an investor to determine which financial activities are contributing to changes in the
return on equity? ✔✔DuPont framework
Knowing that you are taking this finance class, a friend asks you about two investment
opportunities he is considering. He wants to know which of the firms is using its assets more
efficiently to generate sales. Which set of information could help you determine this? ✔✔Firm A
has an asset turnover of 4, and Firm B has an asset turnover of 2.5.
A company currently has a ratio of 1.5 but hopes to improve the ratio to 2 to align more with the
industry benchmark. To achieve this goal, costs were cut in production through an investment in
efficient equipment, and the company achieved a higher profit margin. If this continues, you are
certain that the firm will achieve its goal in two years. What is this an example of? ✔✔Progress
measurement
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