Financial Management for Project Managers Financial Ratio 5 — Questions and Answers
Question 1: A project manager compares the project's current ratio of 0.8 to the industry benchmark of 1.5. What action is most appropriate?
- Increase long-term borrowing immediately
- Investigate and improve short-term liquidity position (Correct answer)
- Ignore it as ratios are not reliable
- Reduce equity to balance the ratio
Correct answer: Investigate and improve short-term liquidity position
A current ratio below 1.0 means current liabilities exceed current assets, indicating a potential short-term liquidity problem to address.
Question 2: Return on assets (ROA) differs from ROE because ROA measures profitability relative to:
- Only equity funding
- Total assets including debt-financed assets (Correct answer)
- Revenue generated
- Operating costs only
Correct answer: Total assets including debt-financed assets
ROA = Net Income / Total Assets, which includes both equity and debt-funded assets, unlike ROE which uses only equity.
Question 3: A project's accounts payable balance is $40,000 and annual purchases are $240,000. What is the payables turnover ratio?
- 0.17
- 6.0 (Correct answer)
- 60
- 4.0
Correct answer: 6.0
Payables Turnover = Annual Purchases / Accounts Payable = $240,000 / $40,000 = 6.0.
Question 4: Which financial ratio is most relevant when a project manager needs to evaluate long-term financial stability rather than short-term liquidity?
- Current ratio
- Quick ratio
- Debt-to-equity ratio (Correct answer)
- Cash ratio
Correct answer: Debt-to-equity ratio
The debt-to-equity ratio measures the proportion of debt vs. equity financing, reflecting long-term capital structure and solvency.
Question 5: A project has gross profit of $180,000 and revenue of $450,000. What is the gross profit margin?
- 25%
- 40% (Correct answer)
- 60%
- 45%
Correct answer: 40%
Gross Profit Margin = Gross Profit / Revenue = $180,000 / $450,000 = 0.40 = 40%.
Question 6: When a project manager sees that the cost-to-income ratio has risen from 55% to 72%, what does this signal?
- Improved cost efficiency
- Revenue has doubled
- Costs are consuming a larger share of income, reducing profitability (Correct answer)
- The project is generating more income
Correct answer: Costs are consuming a larger share of income, reducing profitability
A rising cost-to-income ratio means expenses are growing faster than income, squeezing the project's profit margin.
Question 7: Which of the following best describes the purpose of the cash conversion cycle (CCC) ratio in project financial management?
- Measures how quickly a project can liquidate fixed assets
- Quantifies how long it takes to convert investments in inventory into cash from sales (Correct answer)
- Calculates the ratio of cash to total assets
- Determines the break-even point for a project
Correct answer: Quantifies how long it takes to convert investments in inventory into cash from sales
The CCC measures the time between spending cash on inputs and collecting cash from customers, reflecting working capital efficiency.
Financial Management for Project Managers Financial Ratio 5
A project manager compares the project's current ratio of 0.8 to the industry benchmark of 1.5.
What action is most appropriate?