Usefulness of Ratios (Ch. 14 Financial Statement Analysis) 962-971

current ratio Liquidity ratios are used to evaluate a company's ability to pay current obligations. The current ratio is the only liquidity ratio in the list.

962. Which of the following ratios is useful for evaluating whether a company is able to comfortably pay its current bills? A. current ratio B. debt to assets ratio C. earnings per share D. price -earnings ratio E. payout ratio

return on equity, return on assets, and earnings per share All three of these ratios compare income to some other element that measures the profitability for the year.

963. Which of the following ratios would be useful in analyzing the profitability of a company for a given time period? A. current ratio, receivables turnover, and inventory turnover B. free cash flow, times interest earned, and cash debt coverage C. return on equity, return on assets, and earnings per share D. debt to assets ratio, times interest earned, and current ratio E. average collection period, days in inventory, and free cash flow

payout ratio The payout ratio compares the cash dividends declared on common stock to net income. A retiree looking for dividend income will want to invest in a company that has a high payout ratio.

964. Amanda is retiring and looking to invest in a stock that will provide income in the form of dividends. What ratio would be particularly useful in her analysis?

The company is collecting its receivables faster this year. The accounts receivable turnover illustrates how fast a company can convert its receivables to cash. When the number gets bigger, the company is collecting faster.

965. Antisocial Security Company had an accounts receivable turnover of 10 last year and 11.5 this year. What can you conclude from that information?

A supplier is trying to determine whether a customer is creditworthy. Liquidity ratios are used to evaluate a company's ability to pay current obligations. Before extending credit, the supplier will want to analyze the customer's ability to pay.

966. Which of the following situations is best addressed by analyzing liquidity ratios? A. a city trying to decide which company is more likely to be in business and still employing citizens in 30 years B. an investor who is looking for a profitable company C. a bank looking at the ability of a company to take on more debt D. a supplier trying to determine whether a customer is creditworthy E. a stockholder analyzing her return

times interest earned, cash debt coverage, and free cash flow - Long-term creditors and stockholders are interested in the company's ability to pay its long-term debt. - The times interest earned, cash debt coverage, and free cash flow provide information on repayment ability.

967. Identify three solvency ratios that are used to evaluate the ability of a company to survive over a long period of time.

asset turnover You calculate the ratio by dividing net sales by average total assets. The higher the ratio, the more sales are generated per dollar of assets.

968. Which of the following ratios measures how well a company uses its assets to produce sales? A. asset turnover B. earnings per share C. payout ratio D. debt to assets ratio E. inventory turnover

The company's liquidity is improving. Last year's ratio means that for every dollar in current liabilities, the company had 87 cents of current assets. The next year, it had 90 cents of current assets for every dollar of current liabilities, so the situation has improved.

969. The following information is available from the records of Fiber Palace: - Last year's current ratio: .87 - This year's current ratio: .90 What conclusion can you draw from this information?

BebeBanana is less solvent than the average company in the same industry. - You calculate the debt to assets ratio by dividing total liabilities by total assets. A higher ratio indicates more debt in relation to assets, which means solvency is more fragile.

970. BebeBanana has a debt to assets ratio of 78%. The industry average is 49%. What conclusion can you draw from this information?

No, the solvency ratios are both below the industry average. - A lender would be interested in the borrower's ability to meet interest payment requirements and the amount of leverage existing in the financing of the company's assets. - Both of the company's solvency ratios are worse than the industry average, so making the loan would be risky.

971. Southern North Bank is looking at the financial statements attached to a company's loan application. Information on the ratios: - Times interest earned: 5.8 and industry average is 19.6 - Debt to assets ratio: 81% and industry average is 49% - Current ratio: .89 and industry average is .70 Would you look favorably on this application based on the limited information?