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Stocks 304: Interpreting the Numbers

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1.
The amount of each dollar of sales that a company keeps in the form of gross profit is measured by _______.
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Gross margin. It is calculated by dividing gross profit by sales.
2.
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.
3.
What is the best way to use financial ratios?
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Both of the above. Looked at by themselves, many financial ratios don't tell much. The best way to use them is to compare them with similar companies and to compare them for the same company over time to identify trends.
4.
Company Z has a current ratio of 1.5. This means that _______.
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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.
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.