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Ratios are best described as:

financial analysis tools that measure relationships between financial statement accounts to evaluate a company’s financial performance and condition. Answer “what” about a company’s performance, but not necessarily “why.”

Which of the following should an analyst consider when evaluating financial ratios?

Company Strategy, Industry Norms, Economic Condition

Vertical common-size analysis expresses each account on the income statement as a percentage of:

Revenue

Vertical common-size analysis expresses each account on the balance sheet as a percentage of:

Total Assets

Which common-size statement compares one year's accounts as percentages of a base amount?

Vertical

Which common-size statement compares financial information across years?

Horizontal

Comparing Apple and Microsoft during 2025 is an example of:

Cross sectional analysis

Cross-sectional analysis compares:

Different companies during the same time period

An analyst compares Apple's financial statements from 2023, 2024, and 2025. This is an example of:

Time-series analysis

Time-series analysis compares:

One company's financial performance over several years

Higher activity ratios generally indicate that a company is:

Using its assets more efficiently

Activity ratios primarily measure:

Efficiency

A higher inventory turnover generally suggests:

Inventory is selling more quickly.

A company recently invested in brand-new equipment. What is the MOST likely short-term effect on its Fixed Asset Turnover ratio?

It will decrease initially because fixed assets increase before revenue fully catches up.

DOH (Days Inventory on Hand) measures:

The average number of days inventory remains before being sold.

Receivable Turnover measures:

How quickly customers pay the company

If a company's DOH decreases from 90 days to 45 days, this MOST likely indicates that:

Inventory is being sold more quickly

A higher Receivable Turnover ratio generally indicates that:

The company collects cash from customers more quickly

DSO (Days Sales Outstanding) measures:

The average number of days it takes customers to pay their credit purchases.

If a company's DSO increases from 25 days to 50 days, this MOST likely suggests that:

Customers are taking longer to pay.

Payable Turnover measures:

How often the company pays its suppliers.

A higher Payable Turnover ratio generally indicates that the company:

Pay its suppliers more frequently

Which of the following correctly matches the ratio with what it measures?

DSO → Average number of days it takes customers to pay.

Fixed Asset Turnover measures a company's ability to:

Generate revenue from its investment in fixed assets.

A company purchases expensive new equipment. What is the MOST likely short-term effect on its Fixed Asset Turnover ratio?

It decreases initially because fixed assets increase before additional revenue is generated.

Why can newer assets temporarily reduce the Fixed Asset Turnover ratio?

New assets increase the denominator before revenue has time to increase

Total Asset Turnover measures a company's ability to:

Generate revenue from all of its assets.

A company has a relatively low Total Asset Turnover ratio. Which of the following is the BEST conclusion?

The ratio should be compared with industry norms before drawing conclusions.

According to the lecture, a low Total Asset Turnover ratio is:

Not automatically bad because it depends on the industry.

Which Activity Ratio measures revenue generated from ALL company assets?

Total Asset Turnover

What is the difference between Fixed Asset Turnover and Total Asset Turnover?

Fixed Asset Turnover measures revenue generated from fixed assets only, while Total Asset Turnover measures revenue generated from all assets.

The Current Ratio primarily measures a company's ability to:

Pay its short-term obligations

How does the Quick Ratio differ from the Current Ratio?

It excludes inventory when measuring a company's ability to pay current liabilities

Which liquidity ratio is considered the MOST conservative (strictest)?

Cash ratio

The Defensive Interval Ratio measures:

How many days a company can operate using only its existing liquid assets.

The Cash Conversion Cycle (CCC) measures:

The time required to convert cash invested in operations into cash received from customers.

If a company's Current Ratio is high but its Quick Ratio is much lower, the company likely has:

High inventory

Cash Conversion Cycle measures:

Time required to convert cash invested into cash received

Solvency ratios primarily evaluate:

long-term obligations

The Debt-to-Assets ratio measures:

The percentage of total assets financed by debt.

The Debt-to-Equity ratio measures:

The amount of debt relative to shareholders' equity.

The Debt-to-Capital ratio measures:

The percentage of a company's capital represented by debt.

Cash Conversion Cycle measures:

Time required to convert cash invested into cash received

The Financial Leverage Ratio measures:

The amount of total assets supported by each dollar of equity.

A higher Interest Coverage ratio generally indicates that a company:

Can more easily pay its interest expense.

Fixed Charge Coverage measures a company's ability to:

Cover its fixed obligations, including interest and lease payments.

The Debt-to-EBITDA ratio estimates:

How many years it would take to repay total debt using EBITDA.

Gross Margin indicates a company's ability to:

Generate profit after covering the cost of goods sold.

Operating Margin measures a company's profitability from:

Its core operating activities before interest and taxes.

According to the lecture, Pretax Margin is especially affected by:

Non-operating income and interest expense.

Net Profit Margin measures:

Profit remaining after all expenses have been deducted.

Return on Assets (ROA) measures a company's ability to:

Generate earnings from its total assets.

Return on Equity (ROE) measures:

The return earned for shareholders on their equity investment.

According to DuPont Analysis, Return on Equity (ROE) is determined by:

Profit Margin × Asset Turnover × Financial Leverage

Which DuPont component measures efficiency?

Asset Turnover

Which DuPont component measures solvency?

Financial Leverage

According to the lecture, if a company has NO financial leverage, then:

ROE = ROA

Higher financial leverage improves ROE ONLY when:

The return earned on borrowed money exceeds the borrowing cost.

A company wants to improve its ROE. According to DuPont Analysis, it can improve ROE by:

Increasing Profit Margin, Improving Asset Turnover, Using Financial Leverage effectively.

Which DuPont component tells you how efficiently a company uses its assets to generate sales?

Asset Turnover

The Price-to-Sales (P/S) ratio is especially useful when:

Company has negative net income

The Price-to-Earnings (P/E) ratio measures:

How much investors are willing to pay for $1 of earnings.

According to the lecture, the Price-to-Cash Flow (P/CF) ratio is most useful when:

Earnings quality is poor.

The Retention Rate is equal to:

1 − Dividend Payout Ratio

According to the lecture, Sustainable Growth Rate is calculated as:

ROE × Retention Rate

Who is the primary audience for valuation ratios?

Investors

Which valuation ratio is commonly used as an alternative to P/E(Price-to-Earnings Ratio) when earnings quality is questionable?

P/CF (Price-to-Cash Flow Ratio)