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1.
Company Z has a current ratio of 1.5. This means that _______.
Its current assets should be able to satisfy its short-term obligations. Since current ratio is current assets divided by current liabilities, any ratio over one is a good sign.
2.
Financial ratios typically provide the most benefit when they are _______.
Compared with other identical ratios. Used comparatively, they can provide information about improvements or troubles at a company.
3.
Efficiency ratios measure _______.
How effectively a company manages its assets and liabilities. Inventory turnover, for example, measures how well a company manages its inventory.
4.
As a rule, the more debt a company has, the riskier its stock is. Why?
Debtholders have first claim to a company's assets in the event of bankruptcy. In bad cases, there may be nothing left for stockholders to claim after a bankruptcy.
5.
When calculating a company's return on assets, which of the following expenses should be added back to the numerator after-tax?
Interest. Return on assets measures the profitability of a company, regardless of whether its assets are financed by equityholders or debtholders. As such, we add back in what the debtholders are charging the company to borrow money.
