Finance for Non-Finance Managers Financial Ratios 2

Question 1

A company has a debt-to-equity ratio of 2.5. What does this indicate?

Accepted Answer

The company has $2.50 in debt for every $1 of equity

Answer

A debt-to-equity ratio of 2.5 means the company carries $2.50 of debt for every $1 of shareholder equity, indicating relatively high financial leverage.

Question 2

Which ratio best measures how efficiently a company collects payments from its customers?

Accepted Answer

Accounts receivable turnover ratio

Answer

The accounts receivable turnover ratio measures how many times a company collects its average receivables balance during a period, reflecting collection efficiency.

Question 3

If a firm's gross profit margin is 40% and its net profit margin is 8%, what can you conclude?

Accepted Answer

Operating and other expenses consume 32% of revenue

Answer

The 32-percentage-point gap between gross margin (40%) and net margin (8%) represents operating expenses, interest, and taxes consuming that portion of revenue.

Question 4

What does a price-to-earnings (P/E) ratio of 20 mean for a stock priced at $40?

Accepted Answer

Investors pay $40 for $2 of annual earnings per share

Answer

A P/E of 20 with a $40 stock price implies earnings per share of $2, meaning investors pay $40 for $2 of annual earnings.

Question 5

A company's days payable outstanding (DPO) increases from 30 to 45 days. This generally means the company is:

Accepted Answer

Taking longer to pay its suppliers, improving short-term cash flow

Answer

A higher DPO means the company is delaying supplier payments longer, which keeps cash on hand longer and improves short-term liquidity.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Financial Ratios 2