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Ratios Essay

1126 words - 5 pages

Examples of Questions on Ratio Analysis

A: Multiple Choice Questions

1. Which of the following is considered a profitability measure?

a. Days sales in inventory
b. Fixed asset turnover
c. Price-earnings ratio
d. Cash coverage ratio
e. Return on Assets

2. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. From this we know that

a. Firm A has a higher profit margin than firm B
b. Firm B has a higher profit margin than firm A
c. Firm A and B have the same profit margin ...view middle of the document...

45 |0.40 |0.35 |0.35 |
|Inventory Turnover |62.65 |42.42 |32.25 |53.25 |
|Depreciation/Total Assets |0.25 |0.014 |0.018 |0.015 |
|Days’ sales in receivables |113 |98 |94 |130.25 |
|Debt to Equity |0.75 |0.85 |0.90 |0.88 |
|Profit Margin |0.082 |0.07 |0.06 |0.075 |
|Total Asset Turnover |0.54 |0.65 |0.70 |0.40 |
|Quick Ratio |1.028 |1.03 |1.029 |1.031 |
|Current Ratio |1.33 |1.21 |1.15 |1.25 |
|Times Interest Earned |0.9 |4.375 |4.45 |4.65 |
|Equity Multiplier |1.75 |1.85 |1.90 |1.88 |

a. In the annual report to the shareholders, the CEO of Flipper Inc wrote, “1997 was a good year for the firm with respect to our ability to meet our short-term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities).” Is the CEO correct? Explain and use only relevant information in your analysis.

b. What can you say about the firm's asset management? Be as complete as possible given the above information, but do not use any irrelevant information.

c. You are asked to provide the shareholders with an assessment of the firm's solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information.


Answer 1: e
Answer 2: b (Profit margin of firm A=5.33% and for firm B=7.5% - use Du Pont Identity)
Answer 3: CA/CL=1.2 and (CA-100)/CL=1.1 => solve and find CL=1,000 and CA=1,200=> answer c
Answer: d

ANSWERS TO PROBLEM: (note that these are just examples of a good answer)

a. The answer should be focused on using the current and quick ratios. While the current ratio has steadily increased, it is to be...

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