Finance for Non-Finance Managers Financial Ratios 5

Question 1

Two companies have the same net profit margin but different ROEs. The company with the higher ROE most likely has:

Accepted Answer

Higher financial leverage or greater asset efficiency

Answer

Per the DuPont framework, ROE = Net Margin × Asset Turnover × Equity Multiplier, so a higher ROE with equal margins implies greater leverage or better asset utilization.

Question 2

A company's cash conversion cycle (CCC) is negative. This generally means:

Accepted Answer

The company collects cash from customers before it has to pay its suppliers

Answer

A negative CCC means the business receives customer payments faster than it must pay suppliers, effectively using supplier financing to fund operations — a powerful liquidity advantage.

Question 3

The price-to-book (P/B) ratio compares a company's market value to its:

Accepted Answer

Book value of shareholders' equity

Answer

P/B ratio = Market Price per Share / Book Value per Share, where book value represents shareholders' equity as recorded on the balance sheet.

Question 4

A company reports EBITDA of $1,200,000 and total debt of $4,800,000. Its Debt/EBITDA ratio is:

Accepted Answer

4x

Answer

Debt/EBITDA = $4,800,000 / $1,200,000 = 4x, meaning it would take 4 years of current EBITDA to pay off the debt, a common leverage benchmark used by lenders.

Question 5

Which of the following best explains why two companies in the same industry can have very different current ratios without one necessarily being in better financial health?

Accepted Answer

One company may manage working capital more efficiently, needing less buffer

Answer

An efficient company with fast inventory turnover and short collection cycles needs less current-asset cushion, so a lower current ratio may reflect operational strength, not weakness.

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Practice Test

Finance for Non-Finance Managers Financial Ratios 5