Financial statement analysis

Question 1

What is the rule of thumb ration for current ratio?

Answer 1

2:1

Question 2

What does quick ratio determine?

Answer 2

Measures the firm’s ability to pay-off short term obligations without relying on the sale of inventory

Question 3

What is the rule of thumb for quick ratio?

Answer 3

1:1

Question 4

What are asset management ratio designed to measure?

Answer 4

How effectively management is utilizing the company’s assets, the ratio seek to ascertain whether the investment in assets is justified in relation to activity as measured by sales revenue.

Question 5

What does average collection period measure?

Answer 5

The average collection period (DSO) represents the average length of time that a firm must wait after making a sale before receiving the cash.

Question 6

True or False

The more financial leverage the firm has, the higher its financial risk will be.

Answer 6

True

Question 7

What does debt management ratio assess?

Answer 7

The debt management ratios will try to assess the impact of
financial leverage on risk while the profitability ratios will indicate the impact of financial leverage on risk and shareholders’ returns.

Question 8

True or False

The lower the debt ratio, the higher the financial risk and, while a very low ratio might be unattractive because of the high level of risk, a very high ratio would also be unattractive because of the leveraged returns foregone.

Answer 8

False

The higher the debt ratio, the higher the financial risk and, while a very high ratio might be unattractive because of the high level of risk, a very low ratio would also be unattractive because of the leveraged returns foregone.

Question 9

What does the debt to Earnings before interest and tax, depreciation and amortization (EBITDA) indicate?

Answer 9

This ratio is an indicator of a company’s ability to repay its debt and measures the number of years it will take for the company to repay its debt.
Lenders and credit rating agencies will often use this ratio to indicate the probability of the firm defaulting.

Question 10

What does times interest earned measure?

Answer 10

This ratio measures the extent to which earnings can decline without causing financial losses to the firm and creating an inability to meet the interest cost. Failure to meet this obligation could lead to legal action and ultimately insolvency.