Ratio Analysis

Question 1

What purpose do asset-utilization metrics serve?

Answer 1

They examine the efficiency with which assets are used to maintain and generate wealth.

Question 2

What purpose do market ratios serve?

Answer 2

They are used to evaluate the value of the enterprise as based on capital market reflections of stock price as related to earnings and book value.

Question 3

What purpose do liquidity metrics serve?

Answer 3

They are used to evaluate an enterprise’s ability to meet its short-term obligations.

Question 4

Describe the difference between gross margin (GM) and contribution margin (CM).

Answer 4

GM = revenue minus cost of goods sold; 
CM = revenue minus variable expenses

Question 5

What purpose do debt-utilization metrics serve?

Answer 5

They provide measures of balance sheet risk (i.e., in terms of financial leverage). An enterprise is considered more leveraged and thus more risky, if it has a comparatively high amount of debt versus owners’ equity.

Question 6

List the formula for operating profit margin.

Answer 6

Operating Income / Revenue