Chapter 9. Financial Ratio Analysis


Item 1

Explain how financial ratio analysis can be used to help assess the operating performance and financial condition of a company.

Item 2

Identify the five aspects of operating performance and financial condition that financial ratio analysis can be used to evaluate and their limitations: return on investment, liquidity, profitability, activity, and financial leverage.

Item 3

Differentiate among the following return‐on‐investment ratios and what they indicate for a company's performance: basic earning power, return on assets, and return on equity.

Item 4

Explain how the DuPont system is used to break down return ratios into their components to determine which areas are responsible for a firm's performance.

Item 5

Describe what is meant by liquidity.

Item 6

Explain the following measures of liquidity: current ratio and quick ratio.

Item 7

Relate each of the following measures of profitability to the performance of a company: gross profit margin, operating profit margin, and net profit margin.

Item 8

Explain the following activity ratios to evaluate how effciently a firm is employing its assets: inventory turnover ratio, accounts receivable turnover ratio, total assets turnover ratio, and fixed assets turnover ratio.

Item 9

Describe what is meant by the financial risk of a firm.

Item 10

Describe each of the following financial leverage ratios and discuss how each relates to the evaluation of a company's financial risk: debt‐to‐assets ratio, interest coverage ...

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