Questions
(3-1)
Define each of the following terms:
Œiquidity ratios: current ratio; quick, or acid test, ratio
sset management ratios: inventory turnover ratio; days sales outstanding (DSO); fixed
assets turnover ratio; total assets turnover ratio
†inancial leverage ratios: debt ratio; times-interest-earned (TIE) ratio; EBITDA coverage
ratio
rofitability ratios: profit margin on sales; basic earning power (BEP) ratio; return on
total assets (ROA); return on common equity (ROE)
arket value ratios: price/earnings (P/E) ratio; price/free cash flow ratio; market/book
(M/B) ratio; book value per share
”rend analysis; comparative ratio analysis; benchmarking
„uPont equation; window dressing; seasonal effects on ratios
(3-2)
Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and
short-term creditors. What is the primary emphasis of each of these groups in evaluating
ratios?
(3-3)
Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a drop
in its total assets turnover ratio. However, the companyàsales, quick ratio, and fixed assets
turnover ratio have remained constant. What explains these changes?
(3-4)
Profit margins and turnover ratios vary from one industry to another. What differences would
you expect to find between a grocery chain and a steel company? Think particularly about the
turnover ratios, the profit margin, and the DuPont equation.
(3-5)
How might (a) seasonal factors and (b) different growth rates distort a comparative ratio
analysis? Give some examples. How might these problems be alleviated?
(3-6)
Why is it sometimes misleading to compare a companyàfinancial ratios with those of other
firms that operate in the same industry?

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