Liquidity Ratios
This ratio measures a company’s ability to pay current liabilities using only cash, A/R, and short‑term investments.
What is the acid‑test ratio.
This solvency ratio measures the risk of bankruptcy by comparing total liabilities to equity.
Debt‑to‑equity
This ratio measures the percentage of each sales dollar that becomes gross profit
What is the gross profit ratio
Net sales = $40,000
COGS = $28,000
Compute gross profit, then gross profit ratio
GP = 12,000
GPR = 12,000 ÷ 40,000 = 30%
Company A has a gross profit ratio of 58%, while Company S has 44%.
Which company has stronger markup?
Company A
A Company has current assets of $6,300 and current liabilities of $3,150.
Calculate the current ratio.
6,300 ÷ 3,150 = 2.0
Company B has total liabilities of $24,000 and equity of $16,000.
Calculate the debt‑to‑equity ratio.
24,000 ÷ 16,000 = 1.5
A Company has:
360,000 ÷ 600,000 = 60%
Net sales = $120,000
Operating expenses = $96,000
Compute net income, then profit margin
NI = 24,000
PM = 24,000 ÷ 120,000 = 20%
Company Q has an inventory turnover of 7.0, while Company S has 3.5.
Which sells inventory faster?
Company Q
A Company has net credit sales of $1,800,000 and an average A/R of $225,000.
Calculate receivables turnover.
1,800,000 ÷ 225,000 = 8.0 times
Company A reports:
(900 + 150 + 250) ÷ 150 = 8.0
A Company has:
75,000 ÷ 900,000 = 8.33%
Beginning assets = $900,000
Ending assets = $1,020,000
Net income = $81,000
Compute average assets, then ROA.
Avg assets = 960,000
ROA = 81,000 ÷ 960,000 = 8.44%
Company C has a current ratio of 1.3, while Company P has 2.4.
Which has lower liquidity risk?
Company P
A Company has an inventory turnover of 4.4.
Compute average days in inventory.
365 ÷ 4.4 = 83.0 days
Company C has a Time Interest Earned of 6.2, while Company B has 3.9.
Which company has stronger solvency?
Company C — higher Time Interest Earned = stronger ability to cover interest.
Company N has:
250,000 ÷ 5,000,000 = 5%
Beginning equity = $300,000
Ending equity = $360,000
Net income = $54,000
Compute average equity, then ROE.
Avg equity = 330,000
ROE = 54,000 ÷ 330,000 = 16.36%
Company T has ROA of 6%, while Company B has 9%.
Which uses assets more efficiently
Company B
A Company has:
(1,000 + 1,400 + 600) ÷ 4,000 = 0.75
Interpretation: Below 1 → weak quick liquidity.
Explain why a company with high debt might still attract investors.
High debt increases risk, but also amplifies returns when profits rise (financial leverage)
Company A has a PE ratio of 52, while Company B has 28.
What does this imply?
Investors expect higher future earnings growth from Company A
Company C reports:
NI = 700,000 – 420,000 – 210,000 – 30,000 – 20,000 = 20,000
TIE = (20,000 + 30,000 + 20,000) ÷ 30,000 = 2.33
Explain how two companies can have the same ROA even if one has high profit margin and the other has high asset turnover.
Because ROA = profit margin × asset turnover,
different combinations can produce the same ROA