Match the ratio to the building block of financial statement analysis to which it best relates.
A. Liquidity and efficiency
B. Solvency C. Profitability
D. Market prospects
1. _______ Gross margin ratio
2. _______ Acid-test ratio
3. _______ Equity ratio
4. _______ Return on total assets
5. _______ Dividend yield
6. _______ Book value per common share
7. _______ Days’ sales in inventory
8. _______ Accounts receivable turnover
9. _______ Debt-to-equity
10. _______ Times interest earned
The correct answer and explanation is:
Answers:
- C. Profitability – Gross margin ratio
- A. Liquidity and efficiency – Acid-test ratio
- B. Solvency – Equity ratio
- C. Profitability – Return on total assets
- D. Market prospects – Dividend yield
- D. Market prospects – Book value per common share
- A. Liquidity and efficiency – Days’ sales in inventory
- A. Liquidity and efficiency – Accounts receivable turnover
- B. Solvency – Debt-to-equity
- B. Solvency – Times interest earned
Explanations:
- Gross Margin Ratio (Profitability)
This ratio shows the percentage of revenue remaining after deducting the cost of goods sold (COGS). It evaluates how effectively a company manages production costs relative to sales, highlighting profitability. - Acid-Test Ratio (Liquidity and Efficiency)
This measures a company’s ability to cover immediate liabilities with its most liquid assets. It focuses on short-term financial health, excluding inventory. - Equity Ratio (Solvency)
The equity ratio measures the proportion of assets financed by shareholders’ equity, assessing long-term financial stability and reliance on debt. - Return on Total Assets (Profitability)
This ratio evaluates how efficiently a company generates profit using its total assets, reflecting operational success. - Dividend Yield (Market Prospects)
This ratio indicates how much a company pays in dividends relative to its share price. It’s essential for investors assessing returns on investment. - Book Value per Common Share (Market Prospects)
It reflects the per-share equity available to common shareholders, aiding investors in comparing market value to intrinsic value. - Days’ Sales in Inventory (Liquidity and Efficiency)
This measures how quickly inventory is converted into sales, indicating efficiency in inventory management. - Accounts Receivable Turnover (Liquidity and Efficiency)
This ratio shows how efficiently a company collects receivables, reflecting cash flow and credit policies. - Debt-to-Equity (Solvency)
It measures the proportion of debt and equity in financing assets, providing insights into financial leverage and risk. - Times Interest Earned (Solvency)
This measures a company’s ability to meet interest obligations with operating income, highlighting financial stability in managing debt.