Financial Ratios: Assess Company Health, Profitability, and Efficiency

Question 1

Which of the following is NOT a type of financial ratio used to assess a company's financial performance?

Accepted Answer

Production ratio

Answer

Liquidity ratio

Answer

Profitability ratio

Answer

Solvency ratio

Question 2

Which ratio measures a company's efficiency in using its inventory?

Accepted Answer

Inventory turnover ratio

Answer

Days sales outstanding ratio

Answer

Current ratio

Answer

Quick ratio

Question 3

What is the importance of using financial ratios in conjunction with other financial analysis tools?

Accepted Answer

It provides a more comprehensive view of a company's financial health and reduces the risk of making errors

Answer

It eliminates the need to consider qualitative factors

Answer

It guarantees a positive investment outcome

Answer

It makes financial analysis faster and easier

Question 4

The current ratio measures a company's ability to:

Accepted Answer

Meet its short-term financial obligations

Answer

Generate profits

Answer

Manage its inventory

Answer

Forecast future performance

Question 5

Which ratio is used to evaluate a company's profitability relative to its total revenue?

Accepted Answer

Gross profit margin

Answer

Return on equity

Answer

Debt-to-equity ratio

Answer

Inventory turnover ratio

Question 6

The inventory turnover ratio measures a company's efficiency in:

Accepted Answer

Managing its inventory

Answer

Collecting accounts receivable

Answer

Using its assets

Answer

Paying its expenses

Question 7

Which ratio is used to assess a company's ability to generate cash from its operations?

Accepted Answer

Operating cash flow ratio

Answer

Earnings per share

Answer

Return on assets

Answer

Dividend yield

Question 8

A company with a positive return on equity is:

Accepted Answer

Making a profit

Answer

Losing money

Answer

Breaking even

Answer

Cannot be determined from the provided information

Question 9

Which of the following is an example of a financial ratio that measures a company's solvency?

Accepted Answer

Debt-to-asset ratio

Answer

Inventory turnover ratio

Answer

Gross profit margin

Answer

Return on equity

Question 10

Which of the following is a potential limitation to consider when using financial ratios?

Accepted Answer

Ratios can be manipulated to present a more favorable view of a company's financial position.

Answer

Financial ratios are always accurate and can be used to predict future performance.

Answer

Financial ratios are only useful for analyzing large companies.

Question 11

Which ratio measures a company's profitability relative to its total assets?

Accepted Answer

Return on Assets (ROA)

Answer

Debt-to-Equity Ratio

Answer

Current Ratio

Answer

Price-to-Earnings Ratio

Question 12

A high Current Ratio indicates that:

Accepted Answer

The company has sufficient liquidity to cover its short-term obligations

Answer

The company relies heavily on debt financing

Answer

The company is experiencing financial difficulties

Answer

The company has a fast inventory turnover rate

Question 13

Which of the following is not a type of financial ratio?

Accepted Answer

Stock Price

Answer

Solvency Ratio

Answer

Return on Investment (ROI)

Answer

Management Efficiency Ratio

Question 14

A negative Return on Equity (ROE) implies that:

Accepted Answer

The company is facing financial challenges

Answer

The company is generating a profit

Answer

The company has high retained earnings

Answer

The company's stock is undervalued

Question 15

The Current Assets to Current Liabilities Ratio is used to:

Accepted Answer

Evaluate a company's ability to meet its short-term obligations

Answer

Assess a company's long-term solvency

Answer

Determine a company's profitability

Answer

Measure a company's inventory turnover rate

Question 16

What is the main purpose of liquidity ratios?

Accepted Answer

To evaluate a company's ability to meet its short-term financial commitments and maintain financial stability

Answer

To assess a company's long-term debt obligations

Answer

To indicate a company's ability to generate profits

Question 17

A company with a high inventory turnover ratio typically exhibits:

Accepted Answer

Efficient inventory management practices

Answer

Excessive inventory levels

Answer

Low sales volume

Answer

Ineffective purchasing strategies

Question 18

Which metric measures a company's earnings per outstanding share?

Accepted Answer

Earnings per Share

Answer

Debt-to-Asset Ratio

Answer

Current Asset Ratio

Answer

Return on Investment

Question 19

A company with a low quick ratio may face the risk of:

Accepted Answer

Financial insolvency

Answer

High inventory levels

Answer

Low sales figures

Answer

Excess working capital

Question 20

Which financial ratio indicates the proportion of sales revenue used to cover a company's operating costs?

Accepted Answer

Operating Profit Margin

Answer

Gross Profit Margin

Answer

Net Profit Margin

Answer

Return on Equity

Question 21

A company with a substantial debt-to-equity ratio is generally considered:

Accepted Answer

Highly leveraged

Answer

Financially stable

Answer

Highly profitable

Answer

Liquid

Question 22

A company with positive cash flow from operations but negative free cash flow may be experiencing:

Accepted Answer

High capital expenditures

Answer

Low profitability levels

Answer

Inefficient inventory management

Answer

Excessive dividend payments

Question 23

Which ratio measures the value of a company relative to its market capitalization?

Accepted Answer

Price-to-Earnings Ratio

Answer

Current Ratio

Answer

Return on Assets

Answer

Inventory Turnover Ratio

Question 24

A company with a high return on investment typically indicates:

Accepted Answer

Effective utilization of assets

Answer

High investment risk

Answer

Excessive inventory levels

Answer

Poor financial management strategies

Question 25

To assess a company's long-term ability to meet its financial obligations, which solvency ratio best indicates the proportion of debt used to fund its assets?

Accepted Answer

Debt-to-Equity Ratio

Answer

Current Ratio

Answer

Interest Coverage Ratio

Answer

Quick Ratio

Question 26

While evaluating a company's investment potential by analyzing its financial statements, you calculate the Price-to-Earnings (P/E) ratio as 25. Based on this ratio alone, what should be your initial stance towards investing in this company?

Accepted Answer

Invest cautiously, as a P/E ratio of 25 suggests the company's stock price may be overvalued.

Answer

Invest immediately, as a P/E ratio of 25 is a good indicator of the company's growth potential.

Answer

Avoid investing, as a P/E ratio of 25 is too high and implies the company is overvalued.

Answer

Invest aggressively, as a P/E ratio of 25 indicates the company is undervalued.

Question 27

The current ratio measures a company's ability to meet:

Accepted Answer

Short-term debt obligations

Answer

Long-term debt obligations

Answer

Profitability goals

Answer

Operational efficiency targets

Question 28

A high debt-to-equity ratio typically indicates:

Accepted Answer

Increased financial risk

Answer

Reduced financial risk

Answer

Enhanced profitability

Answer

Improved operational efficiency

Question 29

The gross profit margin measures a company's:

Accepted Answer

Profitability from its core business activities

Answer

Overall profitability

Answer

Efficiency of operations

Answer

Liquidity position

Question 30

A low inventory turnover ratio may suggest:

Accepted Answer

Inefficient inventory management practices

Answer

High customer demand for products

Answer

Low production costs

Answer

Strong sales performance

Question 31

The price-to-earnings ratio (P/E) compares:

Accepted Answer

A company's stock price to its earnings per share

Answer

A company's earnings per share to its stock price

Answer

A company's assets to its liabilities

Answer

A company's revenue to its expenses

Question 32

The dividend payout ratio indicates:

Accepted Answer

The percentage of earnings distributed to shareholders as dividends

Answer

The percentage of revenue used to pay dividends

Answer

The number of shares outstanding

Answer

The company's total assets

Question 33

The Current Ratio measures a company's ability to:

Accepted Answer

Pay its short-term liabilities

Answer

Cover its long-term debts

Answer

Generate positive cash flow

Answer

Assess its overall financial stability

Question 34

Which of the following is a measure of a company's return on its assets?

Accepted Answer

Return on Assets (ROA)

Answer

Debt-to-Equity Ratio

Answer

Gross Profit Margin

Answer

Inventory Turnover

Question 35

The Price-to-Earnings (P/E) Ratio is used to:

Accepted Answer

Compare a company's stock price to its earnings per share

Answer

Measure a company's debt burden

Answer

Determine a company's liquidity position

Answer

Assess a company's operational efficiency

Question 36

Which of the following financial ratios measures a company's ability to manage its inventory effectively?

Accepted Answer

Inventory Turnover

Answer

Days Sales Outstanding

Answer

Return on Equity

Answer

Current Ratio

Question 37

A company with a high Debt-to-Equity Ratio is considered to be:

Accepted Answer

Highly leveraged

Answer

Financially sound

Answer

Liquid

Answer

Stable

Question 38

The DuPont Analysis decomposes a company's Return on Equity (ROE) into:

Accepted Answer

Profit Margin, Asset Turnover, and Financial Leverage

Answer

Liquidity, Solvency, and Profitability

Answer

Current Assets, Fixed Assets, and Investments

Answer

Debt-to-Equity Ratio, Interest Coverage Ratio, and Current Ratio

Question 39

Financial ratios should be used together with other types of analysis to:

Accepted Answer

Gain a comprehensive view of a company's financial performance

Answer

Predict future stock prices with certainty

Answer

Make investment decisions based on speculation

Answer

Eliminate all risk and uncertainty

Question 40

Which financial ratio assesses a company's capability to fulfill its short-term financial obligations?

Accepted Answer

Current ratio

Answer

Price-to-earnings ratio

Answer

Debt-to-asset ratio

Answer

Return on equity

Question 41

A company with a high debt-to-equity ratio can be described as:

Accepted Answer

Highly leveraged

Answer

Well-capitalized

Answer

Profitable

Answer

Prudently managed

Question 42

Which ratio measures a company's profitability in relation to its net sales revenue?

Accepted Answer

Profit margin

Answer

Dividend yield

Answer

Interest coverage ratio

Answer

Asset turnover ratio

Question 43

A company with a high asset turnover ratio is generally considered:

Accepted Answer

Efficient in utilizing its assets

Answer

Inefficient in utilizing its assets

Answer

Highly leveraged

Question 44

Which ratio measures the market value of a company's stock relative to its earnings?

Accepted Answer

Price-to-earnings ratio

Answer

Equity multiplier

Answer

Debt-to-equity ratio

Answer

Return on investment

Question 45

Which ratio measures the extent to which a company relies on debt financing?

Accepted Answer

Debt-to-asset ratio

Answer

Current ratio

Answer

Asset turnover ratio

Question 46

A company with a low current ratio may face the risk of:

Accepted Answer

Failing to meet its short-term obligations

Answer

Being overleveraged

Answer

Having excess cash on hand

Answer

Becoming insolvent

Question 47

Which ratio measures a company's efficiency in converting inventory into sales revenue?

Accepted Answer

Inventory turnover ratio

Answer

Interest coverage ratio

Answer

Current ratio

Answer

Gross profit margin

Question 48

A company with a high times interest earned ratio is considered:

Accepted Answer

Less risky to lenders

Answer

Highly profitable

Answer

More risky to lenders

Answer

Inefficiently managed

Question 49

Which of the following ratios is used to measure the company's liquidity and efficiency in managing inventory?

Accepted Answer

Inventory turnover ratio

Answer

Return on equity

Answer

Current ratio

Answer

Debt-to-equity ratio

Question 50

A company has a profit margin of 10% and a sales revenue of $100,000. What is the company's net income?

Accepted Answer

$10,000

Answer

$90,000

Answer

$20,000

Answer

$110,000

Question 51

Which of the following is NOT a category of financial ratios?

Accepted Answer

Operational ratios

Answer

Liquidity ratios

Answer

Profitability ratios

Answer

Solvency ratios

Question 52

A company with a debt-to-equity ratio of 1.5 has liabilities of $600,000. What is the company's equity?

Accepted Answer

$400,000

Answer

$200,000

Answer

$800,000

Answer

$1,000,000

Question 53

Which of the following ratios indicates the company's efficiency in using its assets to generate sales?

Accepted Answer

Asset turnover ratio

Answer

Return on investment

Answer

Earnings per share

Answer

Current ratio

Question 54

A company with a return on assets (ROA) of 5% has total assets of $1,000,000. What is the company's net income?

Accepted Answer

$50,000

Answer

$25,000

Answer

$75,000

Answer

$100,000

Question 55

Which of the following ratios is used to measure the company's ability to cover its short-term obligations?

Accepted Answer

Quick ratio

Answer

Debt-to-asset ratio

Answer

Gross profit margin

Answer

Return on investment

Question 56

A company with a gross profit margin of 30% has sales revenue of $200,000. What is the company's cost of goods sold?

Accepted Answer

$140,000

Answer

$60,000

Answer

$100,000

Answer

$260,000

Question 57

Which of the following is a limitation of financial ratios?

Accepted Answer

Can be affected by accounting policies and industry norms

Answer

Easy to calculate and interpret

Answer

Provide a comprehensive picture of a company's financial health

Question 58

A company with a debt-to-equity ratio of 2 has a debt of $800,000. What is the company's equity?

Accepted Answer

$400,000

Answer

$200,000

Answer

$1,200,000

Answer

$600,000