Finance for Non-Finance Managers Financial Ratios 3

Question 1

The interest coverage ratio is calculated as:

Accepted Answer

EBIT divided by interest expense

Answer

The interest coverage ratio equals Earnings Before Interest and Taxes (EBIT) divided by interest expense, showing how many times the company can cover its interest payments.

Question 2

A retailer's inventory turnover ratio drops from 12 to 6 over one year. The most likely concern is:

Accepted Answer

Inventory is moving slower, possibly due to weak sales or overstocking

Answer

A falling inventory turnover ratio suggests goods are sitting longer before being sold, which may indicate weakening demand or excess inventory buildup.

Question 3

Which financial ratio is most useful for comparing companies across different industries?

Accepted Answer

EV/EBITDA ratio

Answer

EV/EBITDA removes the effects of capital structure, taxes, and depreciation policies, making it more comparable across industries than most other ratios.

Question 4

If net income is $500,000 and average shareholders' equity is $2,000,000, what is the ROE?

Accepted Answer

25%

Answer

ROE = Net Income / Shareholders' Equity = $500,000 / $2,000,000 = 25%, indicating a 25-cent profit per dollar of equity invested.

Question 5

A company reports operating cash flow of $800,000 and capital expenditures of $300,000. Its free cash flow is:

Accepted Answer

$500,000

Answer

Free cash flow = Operating cash flow − Capital expenditures = $800,000 − $300,000 = $500,000, representing cash available after maintaining or expanding assets.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Financial Ratios 3