# What are financial ratios and why are they useful (attachment) - 75004

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## Greenday

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1.            What are financial ratios and why are they useful?

2.            What are the three types of comparisons that can be made when conducting ratio analyses?

3.            What is meaning of the terms cash build and cash burn?  How do we calculate net cash burn rates?

4.            How is the current ratio calculated and what does it measure?  How does the quick ratio differ from the current ratio?

5.            Describe how a firm’s net working capital (NWC) is measured and how the NWC-to-total- assets ratio is calculated.  What does this ratio measure?

6.            What is meant by a venture’s operating cycle?  Also, describe the cash conversion cycle.

7.            What are the three components of the cash conversion cycle?  How is each component calculated?

8.            Briefly explain how changes in the conversion times of the components of the cash conversion cycle can be interpreted.

9.            What is the meaning of leverage ratios?  What are typical ratios used for relating total debt to a venture’s assets and/or its equity?

10.          What is the importance of the relationship between a venture’s current liabilities and its total debt?

11.          Describe the two types of “coverage” ratios that are typically calculated when trying to assess a venture’s ability to meet its interest payments and other financing-related obligations?

12.          What are four measures used to indicate how efficiently the venture is in generating profits on its sales?  Describe how each measure is calculated.

13.          Identify and describe four profitability/efficiency ratios that combine data from both the income statement and the balance sheet.

14.          Identify and describe the two components of the ROA model both in terms of what financial dimensions they measure and how they are calculated.

15.          What are the three ratio components of the ROE model?  How is each calculated and what financial dimensions do they measure?

16.          Indicate some of the concerns or cautions that need to be considered when conducting ratio analysis

Solution Description

The firm’s current ratio is calculated by dividing the current assets by the current liabilities.  This ratio measures the firm’s ability to pay off their short term debt in the near term.  The quick ratio differs in that it leaves out inventory in calibrating current assets.

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