Financial Ratios

Question 1

What is the formula for the Current Ratio?

Answer 1

Current Ratio = Current Assets / Current Liabilities

Question 2

What does the Current Ratio measure?

Answer 2

It measures a company’s ability to meet short-term liabilities with its short-term assets.

Question 3

What is considered a healthy Current Ratio?

Answer 3

A ratio of 1 or above is generally considered healthy.

Question 4

What is the formula for the Quick Ratio (Acid-Test Ratio)?

Answer 4

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Question 5

What does the Quick Ratio exclude from current assets?

Answer 5

It excludes inventory.

Question 6

What does the Quick Ratio measure?

Answer 6

It measures a company’s ability to meet short-term liabilities using its most liquid assets.

Question 7

What is the formula for Gross Profit Margin?

Answer 7

Gross Profit Margin = (Gross Profit / Revenue) x 100

Question 8

What does the Gross Profit Margin indicate?

Answer 8

It shows how efficiently a company produces and sells its goods.

Question 9

What is the formula for Operating Profit Margin?

Answer 9

Operating Profit Margin = (Operating Income (EBIT) / Revenue) x 100

Question 10

What does the Operating Profit Margin measure?

Answer 10

It shows how much of revenue is left after covering variable costs but before interest and taxes.

Question 11

What is the formula for Net Profit Margin?

Answer 11

Net Profit Margin = (Net Income / Revenue) x 100

Question 12

What does the Net Profit Margin indicate?

Answer 12

It indicates how much profit a company retains from its total revenue after all expenses.

Question 13

What is the formula for Return on Assets (ROA)?

Answer 13

ROA = (Net Income / Total Assets) x 100

Question 14

What does ROA measure?

Answer 14

It measures how efficiently a company uses its assets to generate profit.

Question 15

What is the formula for Return on Equity (ROE)?

Answer 15

ROE = (Net Income / Shareholders’ Equity) x 100

Question 16

What does ROE indicate?

Answer 16

It shows how effectively a company uses equity financing to generate profit.

Question 17

What is the formula for Debt-to-Equity Ratio?

Answer 17

Debt-to-Equity Ratio = Total Debt / Total Equity

Question 18

What does the Debt-to-Equity Ratio measure?

Answer 18

It measures a company’s leverage by comparing its total debt to shareholders’ equity.

Question 19

What is the formula for the Interest Coverage Ratio?

Answer 19

Interest Coverage Ratio = Operating Income (EBIT) / Interest Expense

Question 20

What does the Interest Coverage Ratio indicate?

Answer 20

It shows how easily a company can pay interest on its debt with its earnings before interest and taxes.

Question 21

What is the formula for Debt-to-Assets Ratio?

Answer 21

Debt-to-Assets Ratio = Total Debt / Total Assets

Question 22

What does the Debt-to-Assets Ratio measure?

Answer 22

It measures the proportion of a company’s assets financed through debt.

Question 23

What is the formula for the Asset Turnover Ratio?

Answer 23

Asset Turnover Ratio = Revenue / Average Total Assets

Question 24

What does the Asset Turnover Ratio measure?

Answer 24

It measures how efficiently a company uses its assets to generate sales.

Question 25

What is the formula for the Inventory Turnover Ratio?

Answer 25

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Question 26

What does the Inventory Turnover Ratio measure?

Answer 26

It shows how many times inventory is sold and replaced over a period.

Question 27

What is the formula for the Accounts Receivable Turnover Ratio?

Answer 27

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Question 28

What does the Accounts Receivable Turnover Ratio measure?

Answer 28

It measures how efficiently a company collects revenue from its credit sales.

Question 29

What is the formula for Price-to-Earnings Ratio (P/E Ratio)?

Answer 29

P/E Ratio = Market Price per Share / Earnings per Share (EPS)

Question 30

What does the P/E Ratio indicate?

Answer 30

It shows how much investors are willing to pay per dollar of earnings.

Question 31

What is the formula for Dividend Yield?

Answer 31

Dividend Yield = (Annual Dividends per Share / Price per Share) x 100

Question 32

What does the Dividend Yield indicate?

Answer 32

It shows the annual dividend income as a percentage of the stock’s current market price.