For each ratio, elect the type of information it provides Debt-to-equity ratioSe

Question

For each ratio, elect the type of information it provides Debt-to-equity ratioSelect ] Return on asset V ISelect ] profitability solvency liquidity Question 7 1 pts Which of the following ratios is NOT used to analyze profitability? current ratio return on equity O gross profit margin O return on sales Question 8 1 pts of the following would NOT directly change the account company? Increases in the cost you incur to purchase inventory O offering a cash discount for early payment O Being more selective to who you sell to O selling your inventory on credit at higher prices

Explanation / Answer

Question 6

a. The Debt-Equity ratio measures the proportion of Debt used by a Company to Equity. Essentially, it is a solvency ratio that measures the quantum of debt in the Company's capital.

b. Return on Assets is a profitability ratio. It measures the % return generated per dollar of asset owned by the Company.

Question 7

The return on equity is used to measure the return generated for equity shareholders. It is a measure of how profitable a company is. The gross profit margin is the gross profit as a percentage of sales. It indicates the margin that a company earns on every product sold. The return on sales is teh net income as a percentage of sales. It indicates the return earned by the Company on every dollar of sale made. All these ratios measure the proftiability of a company.

The Current Ratio on the other hand measures the proprotion of current assets to current liabilities. It measures the short term liquidity of a Company. Hence it is not used to analyse profitability.

Question 8

The accounts receivable ratio is a function of the average receivables of a company and its credit sales. Offering a cash discount on early payments changes the average receivables. Being more selective to who you sell would also change the sales direcly. Selling inventory on credit at higher prices is also likely to change the accounts receivable and credit sales made by the Company.

However, Increases in cost is not directly related to credit sales or accounts receivable. It would only affect the inventory, cost and payables. Hence it would not directly change the accounts receivable turnover ratio.

Question 9

Ratios can be used for a variety of purposes. An analyst can track a company's performance using ratios by measuring how far they are from optimal ratios. Ratios of different companies can also be compared to figure out which companies are more favorable to invest in. Furthermore comparing ratios against industry averages helps in understanding the performance of a company as compared to the indstury. Hence all of the uses are correct.

Question 10

The Price earnings ratio is a the ratio of the market price of the Company to the Earnings oof the Company.

PE Ratio = MP per Share/EPS. Essentially it tells us the multiples of earnings that the share is. This is the ratio that incorporates stock market date in the form of market price.

Question 11

The current ratio of 1.2 is the highest. This means the value of current assets is 1.2 times that of the current liabilities. Hence, if liquidated now, the Company would be able to 1.2 of its current liabilities. Between Company 3 and 4, the Company with the higher receivable turnover ratio indicates it is able convert its receivables to cash faster. As a result they will be in a better position to obtain cash from its customers. Hence the 4th Company with Current Ratio of 1.2 and Accounts Receivable Turnover Ratio of 7.0 is least likely to experience problems in paying its current liabilities promptly.

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