Financial Ratios

Question 1

Return on shareholders’ equity (ROE)

Answer 1

(Net income - Preferred stock dividends) / shareholders’ equity

Rate of return generated by a business for its common shareholders

Profitability

Question 2

Return on assets (ROA)

Answer 2

(Net income + [Interest expense (1 - Tax Rate)]/Total Assets

Rate of return generated on a company’s investment in assets from all sources

Profitability

Question 3

Return on sales (ROS)

Answer 3

Net income / Net sales

Percentage of net income remaining from a dollar of sales after subtracting all expenses. aka “Net Profit Margin”

Profitability

Question 4

Net Profit Margin

Answer 4

Net income / Net sales

Percentage of net income remaining from a dollar of sales after subtracting all expenses. aka “Return on Sales (ROS)”

Profitability

Question 5

Gross Profit Margin ratio

Answer 5

(Net sales - Cost of goods sold) / Net sales

Percentage of income generated from sales after deducting the cost of goods sold

Profitability

Question 6

Receivable turnover

Answer 6

Net sales / Accounts Receivable

Number of sales/collection cycles experienced by a firm

Asset Management

Question 7

Receivable collection period

Answer 7

365 / (Net sales / Accounts receivable)

Number of days required, on average, to collect an outstanding account receivable

Asset Management

Question 8

Inventory turnover

Answer 8

Cost of goods sold / Inventory

Number of production/sales cycles experienced by a firm

Asset Management

Question 9

Inventory on-hand period

Answer 9

365 / (cost of goods sold / inventory)

Number of days, on average, required to sell the inventory currently on hand

Asset Management

Question 10

Asset turnover

Answer 10

Net sales / Total assets

Amount of sales generated from each dollar invested in assets

Asset Management

Question 11

Cash and marketable securities to total assets

Answer 11

(Cash + Marketable securities) / Total Assets

Percentage of total assets held as highly liquid assets

Liquidity

Question 12

Quick ratio

Answer 12

(Cash + Marketable securities + Accounts receivable) / current liabilities

Amount of liquid assets available to pay short-term liabilities

Liquidity

Question 13

Current ratio

Answer 13

Current assets / Current liabilities

Amount of current assets available to service current liabilities

Liquidity

Question 14

Accounts payable turnover

Answer 14

Cost of goods sold / Accounts payable

Number of account payment cycles experienced by a firm

Liquidity

Question 15

Days’ payable period

Answer 15

365 / (Cost of goods sold / Accounts Payable)

Number of days, on average, required to pay an outstanding account payable

Liquidity

Question 16

Long-term debt to total assets

Answer 16

(Long-term debt + Current portion of long-term debt) / Total assets

Percentage of total assets provided by creditors

Solvency

Question 17

Long-term debt to shareholders’ equity

Answer 17

(Long-term debt + Current portion of long-term debt) / Shareholders’ equity

Relative investment of long-term creditors versus shareholders in a business

Solvency

Question 18

Interest coverage ratio

Answer 18

(Net income before taxes + Interest expense) / Interest Expense

Extent to which current operating income covers current debt service charges

Solvency

Question 19

Financial Leverage

Answer 19

Total assets / Shareholders’ equity

Relative size of total assets to total shareholders’ equity

Solvency

Question 20

Liquidity

Answer 20

the ability of a company of pay its outstanding short-term obligations

Question 21

Solvency

Answer 21

the ability of a company to repay its long-term obligations