Financial Analysis for Business Studies: Master Financial Ratios

Question 1

Which financial ratio measures a company's ability to cover its short-term debts?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Interest coverage ratio

Question 2

Which of the following financial ratios measures a company's ability to meet its short-term obligations using its liquid assets?

Accepted Answer

Acid-test ratio

Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Return on assets

Question 3

A company reports a net profit of £100,000 and sales revenue of £500,000. What is its profit margin?

Accepted Answer

10%

Answer

5%

Answer

20%

Answer

25%

Question 4

An inventory turnover ratio of 4 for a company implies that:

Accepted Answer

It sells its inventory 4 times a year

Answer

It holds 4 times more inventory than it sells

Answer

Its cost of goods sold is 4 times its inventory value

Answer

Its inventory is valued at 4 times its cost

Question 5

A company's debt-to-equity ratio is 1.5. This means that:

Accepted Answer

It has more debt than equity

Answer

It has more equity than debt

Answer

Its debt and equity are equal

Answer

Its debt-to-asset ratio is 1.5

Question 6

An interest coverage ratio of 4 for a company indicates that:

Accepted Answer

It can cover its interest expenses 4 times over

Answer

Its interest expenses are 4 times its earnings before interest and taxes

Answer

Its debt is 4 times its equity

Answer

Its liquidity is sufficient to cover its current liabilities

Question 7

Which financial ratio assesses a company's capacity to fulfill its short-term obligations using its current assets?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Inventory turnover ratio

Answer

Return on equity

Question 8

A high inventory turnover ratio suggests that a company:

Accepted Answer

Sells inventory swiftly

Answer

Holds excessive inventory

Answer

Experiences low demand for their products

Answer

Incur high storage costs

Question 9

A current ratio of 2 implies that:

Accepted Answer

More current assets than current liabilities

Answer

More current liabilities than current assets

Answer

Potential liquidity issues

Answer

High level of solvency

Question 10

Which aspect is NOT a key purpose of financial ratios?

Accepted Answer

Determining a company's tax liability

Answer

Identifying trends in a company's financial health

Answer

Providing guidance for investment decisions

Answer

Evaluating a company's financial performance

Question 11

Which ratio indicates a company's ability to meet its long-term financial obligations?

Accepted Answer

Debt-to-equity ratio

Answer

Acid-test ratio

Answer

Inventory turnover ratio

Answer

Receivables turnover ratio

Question 12

Which financial ratio assesses a company's ability to cover its short-term financial obligations?

Accepted Answer

Quick ratio

Answer

Debt-to-equity ratio

Answer

Return on investment

Answer

Gross profit margin

Question 13

A company with a high gross profit margin typically indicates:

Accepted Answer

Increased profitability

Answer

Elevated operating expenses

Answer

Reduced sales revenue

Answer

Slow inventory turnover

Question 14

Which ratio measures the percentage of a company's assets that are funded through debt?

Accepted Answer

Debt-to-equity ratio

Answer

Current ratio

Answer

Return on assets

Answer

Acid-test ratio

Question 15

The formula to calculate return on equity (ROE) is:

Accepted Answer

Net income / Shareholder equity

Answer

Sales revenue / Shareholder equity

Answer

Total assets / Shareholder equity

Answer

Operating profit / Shareholder equity

Question 16

A company with a low inventory turnover ratio may face issues with:

Accepted Answer

Suboptimal inventory management

Answer

High consumer demand

Answer

Swift product sales

Answer

Low production costs

Question 17

Which of the following is not categorized as a financial ratio type?

Accepted Answer

Human resources ratio

Answer

Profitability ratio

Answer

Solvency ratio

Answer

Liquidity ratio

Question 18

A company with a high debt-to-equity ratio is:

Accepted Answer

Highly leveraged

Answer

Financially secure

Answer

Highly profitable

Answer

Liquid

Question 19

Financial ratios can be utilized to assess a company's performance over:

Accepted Answer

Multiple financial years

Answer

The previous financial year

Answer

The upcoming financial year

Answer

Only the present month

Question 20

The current ratio is a measure of a company's:

Accepted Answer

Liquidity

Answer

Profitability

Answer

Solvency

Answer

Efficiency

Question 21

Which of the following ratios measures a company's ability to generate income relative to its assets?

Accepted Answer

Return on assets

Answer

Debt-to-equity ratio

Answer

Interest coverage ratio

Answer

Inventory turnover ratio

Question 22

The gross profit margin is calculated by dividing:

Accepted Answer

Gross profit by total revenue

Answer

Net income by total revenue

Answer

Operating profit by total revenue

Answer

EBITDA by total revenue

Question 23

The debt-to-equity ratio measures a company's:

Accepted Answer

Solvency

Answer

Profitability

Answer

Liquidity

Answer

Efficiency

Question 24

When evaluating a company's financial performance using financial ratios, it's crucial to consider their limitations. Which of the following is a significant limitation of relying solely on financial ratios?

Accepted Answer

Financial ratios are vulnerable to manipulation by companies seeking to portray a more favorable financial position.

Answer

Financial ratios offer a complete picture of a company's financial health.

Answer

Financial ratios can be directly compared between companies of different sizes and industries.

Answer

Financial ratios are always precise and dependable indicators of a company's financial health.

Question 25

Which of the following is NOT a measure of a company's profitability?

Accepted Answer

Debt-to-equity ratio

Answer

Gross profit margin

Answer

Net profit margin

Answer

Return on equity

Question 26

A company with a current ratio of 1.5:

Accepted Answer

Has more current assets than current liabilities

Answer

Has less current assets than current liabilities

Answer

Has equal current assets and current liabilities

Answer

Cannot be determined from the given information

Question 27

The debt-to-equity ratio indicates:

Accepted Answer

The proportion of debt financing a company uses

Answer

A company's ability to meet short-term financial obligations

Answer

A company's overall financial strength

Answer

A company's profitability

Question 28

A higher inventory turnover ratio suggests:

Accepted Answer

Faster inventory turnover and improved cash flow

Answer

Slower inventory turnover and increased storage costs

Answer

Increased inventory levels and potential obsolescence

Answer

Reduced sales and decreased profitability

Question 29

When comparing financial ratios over multiple periods:

Accepted Answer

Use the same ratios to ensure consistency

Answer

Use different ratios to gain a broader perspective

Answer

Adjust ratios for inflation to make them comparable

Answer

Ignore ratios that have not changed significantly

Question 30

The return on equity ratio measures:

Accepted Answer

A company's profitability relative to its shareholders' investment

Answer

A company's liquidity and ability to meet short-term obligations

Answer

A company's solvency and ability to repay long-term debt

Answer

A company's efficiency in using its assets

Question 31

A company with a high debt-to-equity ratio is more likely to be considered:

Accepted Answer

Financially risky

Answer

Financially stable

Answer

Profitable

Answer

Liquid

Question 32

The formula for calculating net profit margin is:

Accepted Answer

Net profit / Total revenue

Answer

Net profit / Average total assets

Answer

Net profit / Current liabilities

Answer

Current assets / Current liabilities

Question 33

A company's inventory turnover ratio is 3.5. What does this indicate about the company's inventory management?

Accepted Answer

The company is managing its inventory efficiently.

Answer

The company is holding onto inventory for too long.

Answer

The company has a high level of obsolete inventory.

Answer

The company is experiencing a high demand for its products.

Question 34

How can financial ratios help us spot trends in a company's financial performance over time?

Accepted Answer

Comparing ratios over several periods

Answer

Using ratios to predict future performance

Answer

Comparing ratios only to industry benchmarks

Answer

Using ratios to value a company's stock

Question 35

Which of the following is NOT a type of financial ratio?

Accepted Answer

Customer Satisfaction Index

Answer

Profitability ratio

Answer

Liquidity ratio

Answer

Solvency ratio

Question 36

Which ratio measures a company's ability to meet its short-term financial obligations?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Return on equity

Question 37

Which ratio indicates the proportion of a company's assets that are financed using debt?

Accepted Answer

Debt-to-asset ratio

Answer

Inventory turnover ratio

Answer

Dividend payout ratio

Answer

Net profit margin

Question 38

Which ratio measures a company's profitability in relation to its net sales revenue?

Accepted Answer

Net profit margin

Answer

Return on investment

Answer

Current ratio

Answer

Operating profit margin

Question 39

Which of the following is a limitation of using financial ratios?

Accepted Answer

Ratios can be distorted by creative accounting practices.

Answer

Ratios can be used to compare companies of different sizes and industries.

Answer

Ratios are always accurate.

Question 40

A company has a current ratio of 1.2. What does this indicate?

Accepted Answer

The company has 1.2 times more current assets than current liabilities.

Answer

The company is insolvent.

Answer

The company has 1.2 times more current liabilities than current assets.

Question 41

Which of the following ratios would be most useful for assessing a company's ability to generate cash?

Accepted Answer

Operating cash flow ratio

Answer

Inventory turnover ratio

Answer

Debt-to-equity ratio

Answer

Return on assets

Question 42

A company has a high debt-to-equity ratio. What does this suggest?

Accepted Answer

The company is heavily reliant on debt financing.

Answer

The company has a low risk of bankruptcy.

Answer

The company has a large amount of equity financing.

Answer

The company is financially stable.

Question 43

Which of the following is a benefit of using financial ratios?

Accepted Answer

Ratios allow for comparisons between companies and industries.

Answer

Ratios can be used to manipulate financial statements.

Answer

Ratios are always accurate.

Question 44

A company has a net profit margin of 5%. What does this mean?

Accepted Answer

For every £1 of sales revenue, the company makes 5p of net profit.

Answer

The company's gross profit margin is 5%.

Answer

The company's net profit is 5% of its total assets.

Question 45

A company's gross profit margin is 50%. This means that:

Accepted Answer

For every £1 of revenue, the company earns £0.50 in gross profit.

Answer

The company incurs £0.50 in gross profit for every £1 of revenue.

Answer

For every £1 of gross profit, the company earns £0.50 in revenue.

Question 46

Which financial ratio measures a company's reliance on debt financing?

Accepted Answer

Debt-to-equity ratio

Answer

Return on investment

Answer

Inventory turnover ratio

Answer

Acid-test ratio

Question 47

A company with a high return on assets (ROA) indicates:

Accepted Answer

Effective utilization of its assets to generate profits.

Answer

Excessive inventory levels

Answer

Low liquidity

Answer

High reliance on external financing

Question 48

Which financial ratio measures a company's capacity to meet interest payments on its debt?

Accepted Answer

Times interest earned ratio

Answer

Debt-to-asset ratio

Answer

Dividend yield ratio

Question 49

A company with a low inventory turnover ratio may be experiencing:

Accepted Answer

Excessive inventory levels.

Answer

Accurate inventory records.

Answer

Efficient inventory management practices.

Answer

High demand for its products.

Question 50

Which assumption is crucial for effective financial ratio analysis?

Accepted Answer

The financial statements used are accurate and reliable.

Answer

All companies adhere to the same accounting standards.

Answer

Economic conditions have no impact on financial ratios.

Answer

Financial ratios are the sole indicator of a company's performance.

Question 51

What does a high net profit margin indicate?

Accepted Answer

The company is successful in converting sales into net profit.

Answer

The company has a distinct competitive edge.

Answer

The company has minimal operating expenses.