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Stocks 304: Interpreting the Numbers

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1.
As a rule, the more debt a company has, the riskier its stock is. Why?
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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.
2.
Financial ratios typically provide the most benefit when they are _______.
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Compared with other identical ratios. Used comparatively, they can provide information about improvements or troubles at a company.
3.
When calculating a company's return on assets, which of the following expenses should be added back to the numerator after-tax?
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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.
4.
Which ratio simply measures the ability of a company's cash and any investments that are easily converted into cash to pay its short-term obligations?
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Cash ratio. Cash ratio is the most conservative of the liquidity ratios.
5.
Efficiency ratios measure _______.
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How effectively a company manages its assets and liabilities. Inventory turnover, for example, measures how well a company manages its inventory.