Financial Management for Project Managers Financial Ratio 4

Question 1

Which ratio specifically helps a project manager assess whether the project can service its debt obligations from operating earnings?

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

DSCR = Net Operating Income / Total Debt Service, measuring ability to cover debt payments from operations.

Question 2

A project generates $120,000 in net income on $800,000 in equity. What is the return on equity (ROE)?

Accepted Answer

15%

Answer

ROE = Net Income / Equity = $120,000 / $800,000 = 0.15 = 15%.

Question 3

In financial ratio analysis, what does a high inventory turnover ratio generally indicate for a project?

Accepted Answer

Inventory is being sold and replenished efficiently

Answer

A high inventory turnover ratio indicates that inventory is being converted to sales quickly, reflecting operational efficiency.

Question 4

A project manager is reviewing a project with EBITDA of $200,000 and total debt of $800,000. What is the debt-to-EBITDA ratio?

Accepted Answer

4.0

Answer

Debt-to-EBITDA = Total Debt / EBITDA = $800,000 / $200,000 = 4.0.

Question 5

What is the primary limitation of using financial ratios in isolation when evaluating a project?

Accepted Answer

Ratios lack industry or benchmark context to determine whether values are good or bad

Answer

A ratio value is meaningless without comparison to industry benchmarks, historical trends, or project targets.

Financial Management for Project Managers Practice Test