Ratio Analysis Flashcards

1
Q

What purpose do debt-utilization metrics serve?

A

They provide measures of balance sheet risk (i.e., in terms of financial leverage). An enterprise is considered more leveraged, and thus more risky, if it has a comparatively high amount of debt versus owners’ equity.

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2
Q

What purpose do market ratios serve?

A

They are used to evaluate the value of the enterprise as based on capital market reflections of stock price as related to earnings and book value.

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3
Q

What purpose do asset-utilization metrics serve?

A

They examine the efficiency with which assets are used to maintain and generate wealth.

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4
Q

Describe the difference between gross margin (GM) and contribution margin (CM).

A

GM = revenue minus cost of goods sold; CM = revenue minus variable expenses.

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5
Q

List the formula for operating profit margin.

A

Operating income / Revenue.

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6
Q

What purpose do liquidity metrics serve?

A

They are used to evaluate an enterprise’s ability to meet its short-term obligations.

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