Ratios (Q4)

Question 1

Ability to Pay Debts

Answer 1

Current Ratio= current assets/ current liabilities

Question 2

Current Ratio

Answer 2

• Current Ratio= current assets/ current liabilities
• The higher the ratio, the better you are (should be higher than industry standard)
• Anything below one means there are more debts than assets

Question 3

Managing Profits that are generated from the firm’s assets

Answer 3

Return on Assets= Operating Profits/total assets

Question 4

Return on Assets

Answer 4

• Return on Assets= Operating Profits/total assets
• The higher the ratio, the better you are

Question 5

Establishing Leverage

Answer 5

• financing using debts
• Debt Ratio=Total Debt/Total Assets

Question 6

Debt Ratio

Answer 6

• Debt Ratio=Total Debt/Total Assets
• The higher the debt, the riskier your business becomes
• A lower number is better

Question 7

Rate of Return on Owner’s Equity

Answer 7

• Money in your pocket if you’re an owner/investor
• Return on Equity: Net Profits/total owner’s equity

Question 8

Return on Equity

Answer 8

• Return on Equity: Net Profits/total owner’s equity
• Money in your pocket if you’re an owner/investor
  -Return should be more than your investment

Question 9

When is it better for a business to use “Leverage”

Answer 9

If the business’s debt ratio is lower than the return on assets, it is better to leverage with debt than your own money