Ratios

Question 1

Name four types of ratios

Answer 1

Liquidity
Capital adequacy/leverage
Asset quality/asset management
Earnings/profitability

Question 2

What type of ratio, and what is the definition of the current ratio? What numbers are desired?

Answer 2

Liquidity ratio
Current assets /current liabilities
>1

Question 3

What type of ratio, and what is the definition of the quick/acid-test ratio? What numbers are desired?

Answer 3

Liquidity
Cash + AR + mrksec / current liabilities
>1

Question 4

What type of ratio, and what is the definition of the debt ratio? What numbers are desired?

Answer 4

Capital adequacy/leverage
Total liabilities / total assets
0 < x < 1

Question 5

What type of ratio, and what is the definition of the interest coverage ratio? What numbers are desired?

Answer 5

Capital adequacy / leverage

Earnings before interest, tax / interest expense

Bigger is better

Question 6

What type of ratio, and what is the definition of the inventory turnover ratio? What numbers are desired?

Answer 6

Asset quality ratios
CGS / average inventory
Bigger the better

Question 7

What type of ratio, and what is the definition of the asset turnover ratio? What numbers are desired?

Answer 7

Asset management
Sales / average total assets
Bigger is better

Question 8

What type of ratio, and what is the definition of the profit margin ratio? What numbers are desired?

Answer 8

Earnings/profitability
Net income / sales
Higher is better

Question 9

What type of ratio, and what is the definition of the return on assets ratio? What numbers are desired?

Answer 9

Earnings/profitability ratio
Net income / average total assets
Meaningfully compare corps