Ratio terms

Question 1

Profitability ratios

Answer 1

Measure a company’s profitability

• Return on assets (ROA)
• Return on equity (ROE)
• Return on sales (ROS)
• Operating margin

Question 2

Operating ratios

Answer 2

Assesses a company’s level of efficiency, specifically in managing cash and using assets

• Asset turnover
• Days sales outstanding (DSO)
• Days payable outstanding (DPO)
• Days inventory outstanding (DIO)

Question 3

Liquidity ratios

Answer 3

Inform about a company’s ability to meet short-term financial obligations

• Current ratio
• Quick ratio

Question 4

Leverage ratios

Answer 4

Inform to what extent a company uses debt to pay for its operations and how easily it can cover the cost of that debt

• Interest coverage
• Debt to equity

Question 5

Return on assets (ROA)

Answer 5

Measures well a company uses assets to generate profit

Question 6

Return on equity (ROE)

Answer 6

The owners return on investment, showing profit as a percentage of owners equity

Question 7

Return on sales (ROS)

Answer 7

Also called net profit margin, measures how well a company is controlling its costs and turning revenue into profit

Question 8

Gross profit margin

Answer 8

Measures how efficiently a company produces its goods or delivers its services.

Question 9

Operating margin

Answer 9

Also called earnings before interest and tax (EBIT), measures how profitable a company’s operations are without regard to how they are financed or taxed.

Question 10

Asset turnover

Answer 10

Measures how efficiently a company manage all of its assets to generate revenue.

Question 11

Days sales outstanding (DSO)

Answer 11

Also called receivable days, measures how quickly a company collects funds from customers.

Question 12

Days payable outstanding (DPO)

Answer 12

Also called days payable, measure how quickly a company pays its suppliers.

Question 13

Days inventory outstanding (DIO)

Answer 13

Also called inventory days, measures how quickly a company sells inventory during a given time period.

Question 14

Current ratio

Answer 14

Measures a company’s current assets against its current liabilities.

Question 15

Quick ratio

Answer 15

Also called the acid test, measures the company’s ability to pay its bills quickly.

Question 16

Interest coverage

Answer 16

Measure how profit compares to interest payments in a given period.

Question 17

Debt to equity

Answer 17

Shows the extent to which a company is using borrowed money to enhance the return on owner’s equity.

Question 18

Economic value added (EVA)

Answer 18

The profit remaining after the company had accounted for the cost of capital.