Financial Ratios

21 important questions on Financial Ratios

What is a common-size statement?

A financial statement which is completely composed of percentages. This makes comparison with other company statements easier

What are financial ratios?

Calculation tools that are used to examine the relationship between different parts of financial information

What is the average tax rate?

The actual percentage of income spent on tax payments
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What is the marginal tax rate?

The percentage that must be paid to the tax authorities when you earn one euro extra.

What is a flat-rate tax?

The average and marginal tax rate are equal to each other. This means that there is only one percentage that applies to all incomes

What are the 4 types of financial ratios?

1. Solvability ratios
2. Efficiency ratios
3. Profitability ratios
4. Market prospect ratios

What are the 2 types of solvability ratios?

1. Liquidity ratios
2. Solvency ratios

What are liquidity ratios?

Short-term solvability ratios that are used to examine if a company is able to pay its short-term liabilities.

What is the cash ratio?

(cash + cash equivalents) / short-term liabilities. Liquidity ratio in purest condition. Only liquid assets are taken into account, to ensure that there is no uncertainty that the assets may not be converted into cash

What is the debt-to-equity ratio?

Total liabilities / total equity. Shows the relation between liabilities and equity

What is the TIE ratio/IC ratio?

Times Interest Earned ratio, Interest Coverage ratio. EBIT / interest cost. Determines company's ability to cover their interest costs

What are the 5 solvency ratios?

1. Debt ratio
2. Debt-to-equity ratio
3. Equity multiplier
4. TIE ratio/IC ratio
5. Cash coverage ratio

What is days' in inventory?

365 days / inventory turnover. Measures the number of days a product stays in the inventory on average

What is receivables turnover?

Net credit sales / average accounts receivable. Shows how many times a year an organisation receives money of its accounts receivable. Higher ratio indicates more efficient way of providing credit and collecting debt.

What is total assets turnover ratio?

Sales or revenues / total assets. Shows how much revenue is generated per euro of asset.

What is operating cash flow?

EBIT + depreciations - tax. Indicates net income generated from operational activities.

What is the profit margin?

Net income / sales revenue. Determines percentage of sales that remains as net income

What is Return on Equity?

Net income / Total equity. Determines how much net income is generated per unit of equity

What is the DuPont identity?

Different formulation of the ROE that allows companies to identify possible causes of a dissatisfactory roe. ROE = profit margin x Total Asset turnover ratio x Equity multiplier.
1. Profit margin indicates operating efficiency
2. Total asset turnover ratio indicates efficiency of the utilisation of assets
3. Equity multiplier indicates financial leverage

What is the Price-Earnings ratio?

Price per share / earnings per share. Determines how much investors are willing to pay for €1 of earnings. High P/E ratio shows trust of investor in the share and that they estimate a high growth for the company

In which 2 ways can financial ratios be benchmarked?

1. Time trend analysis - using ratios of previous years
2. Peer group analysis - using companies that compete on the same market, have same kind of assets, etc. a peer group is established from which the ratios are compared with each other.

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