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Liquidity Ratios
Solvency Ratio
Profitability Ratio
Calculate - First Ratios
Comparison & Interpretation
100

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.

100

This solvency ratio measures the risk of bankruptcy by comparing total liabilities to equity.

Debt‑to‑equity

100

This ratio measures the percentage of each sales dollar that becomes gross profit

What is the gross profit ratio

100

Net sales = $40,000
COGS = $28,000
Compute gross profit, then gross profit ratio

GP = 12,000
GPR = 12,000 ÷ 40,000 = 30%

100

Company A has a gross profit ratio of 58%, while Company S has 44%.
Which company has stronger markup?

Company A

200

A Company has current assets of $6,300 and current liabilities of $3,150.
Calculate the current ratio.

6,300 ÷ 3,150 = 2.0

200

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

200

A Company has:

  • Gross profit = $360,000
  • Net sales = $600,000
    Calculate the gross profit ratio

360,000 ÷ 600,000 = 60%

200

Net sales = $120,000
Operating expenses = $96,000
Compute net income, then profit margin

NI = 24,000
PM = 24,000 ÷ 120,000 = 20%

200

Company Q has an inventory turnover of 7.0, while Company S has 3.5.
Which sells inventory faster?

Company Q

300

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

300

Company A reports:

  • Net income = $900
  • Interest expense = $150
  • Income tax expense = $250
    Calculate times interest earned.

(900 + 150 + 250) ÷ 150 = 8.0

300

A Company has:

  • Net income = $75,000
  • Net sales = $900,000
    Calculate profit margin

75,000 ÷ 900,000 = 8.33%

300

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%

300

Company C has a current ratio of 1.3, while Company P has 2.4.
Which has lower liquidity risk?

Company P

400

A Company has an inventory turnover of 4.4.
Compute average days in inventory.

365 ÷ 4.4 = 83.0 days

400

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.

400

Company N has:

  • Net income = $250,000
  • Average total assets = $5,000,000
    Calculate ROA.

250,000 ÷ 5,000,000 = 5%

400

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%

400

Company T has ROA of 6%, while Company B has 9%.
Which uses assets more efficiently

Company B

500

A Company has:

  • Cash = $1,000
  • A/R = $1,400
  • Short‑term investments = $600
  • Current liabilities = $4,000
    Calculate the acid‑test ratio and interpret it.

(1,000 + 1,400 + 600) ÷ 4,000 = 0.75
Interpretation: Below 1 → weak quick liquidity.

500

Explain why a company with high debt might still attract investors.

High debt increases risk, but also amplifies returns when profits rise (financial leverage)

500

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

500

Company C reports:

  • Net sales = $700,000
  • COGS = $420,000
  • Operating expenses = $210,000
  • Interest expense = $30,000
  • Tax expense = $20,000
    Compute net income, then multiply by interest earned.

NI = 700,000 – 420,000 – 210,000 – 30,000 – 20,000 = 20,000
TIE = (20,000 + 30,000 + 20,000) ÷ 30,000 = 2.33

500

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