Deck 4: Ratios and Interpretation: a Straightforward Introduction

Question 1

The following information is from the annual report of Thunderstruck Ltd:
Statement of financial position of Thunderstruck Ltd as at 31 December 201X

Income statement extract of Thunderstruck Ltd for the year ended 31 December 201X
$$\begin{array} { l r } \text { Revenue } & 250 \\\text { Gross profit } & 75 \\\text { Operating profit } & 45 \\\text { Profit for the period } & 25\end{array}$$
From the information provide above,calculate return on long term capital employed

A) 24.3%
B) 30%
C) 13.5%
D) 19.5%

Answer 1

24.3%

Question 2

The following information is from the annual report of Thunderstruck Ltd:
Statement of financial position of Thunderstruck Ltd as at 31 December 201X

Income statement extract of Thunderstruck Ltd for the year ended 31 December 201X
$$\begin{array} { l r } \text { Revenue } & 250 \\\text { Gross profit } & 75 \\\text { Operating profit } & 45 \\\text { Profit for the period } & 25\end{array}$$
From the information provide above,calculate the liquidity ratio

A) 2.44:1
B) 2:1
C) 1.48:1
D) 1.77:1

Answer 2

1.77:1

Question 3

Which of the following rations considers the relationship between profit,equity and long-term borrowing?

A) Quick ratio
B) Current ratio
C) Capital gearing ratio
D) ROCE

Answer 3

D

Question 4

If a supplier was interested in whether or not they will be paid on time,which of the calculations would they make?

A) Trade receivables /sales revenue x 365
B) Sales revenue/trade receivables x 365
C) Trade payables/cost of sales x 365
D) Cost of sales/trade payables x 365

Question 5

One way to improve return on capital employed (ROCE)is to reduce costs and increase sales

Question 6

The following information is from the annual report of Thunderstruck Ltd:
Statement of financial position of Thunderstruck Ltd as at 31 December 201X

Income statement extract of Thunderstruck Ltd for the year ended 31 December 201X
$$\begin{array} { l r } \text { Revenue } & 250 \\\text { Gross profit } & 75 \\\text { Operating profit } & 45 \\\text { Profit for the period } & 25\end{array}$$
From the information provide above,calculate the capital gearing ratio

A) 62.9%
B) 67.4%
C) 59.5%
D) 56.3%

Question 7

Financial strength/solvency ratios include:

A) Return on shareholders funds, asset turnover and gross profit ratio
B) Stock turnover ratio, debtor ratio and creditor ratio
C) Price earnings ratio, dividend cover and dividend yield
D) Current ratio, quick ratio and capital gearing ratio

Question 8

The following information is from the annual report of Thunderstruck Ltd:
Statement of financial position of Thunderstruck Ltd as at 31 December 201X

Income statement extract of Thunderstruck Ltd for the year ended 31 December 201X
$$\begin{array} { l r } \text { Revenue } & 250 \\\text { Gross profit } & 75 \\\text { Operating profit } & 45 \\\text { Profit for the period } & 25\end{array}$$
From the information provide above,calculate the gross profit ratio

A) 40%
B) 30%
C) 10%
D) 20%

Question 9

Non-current liabilities are used in the calculation of the current ratio

Question 10

The following information is from the annual report of Thunderstruck Ltd:
Statement of financial position of Thunderstruck Ltd as at 31 December 201X

Income statement extract of Thunderstruck Ltd for the year ended 31 December 201X
$$\begin{array} { l r } \text { Revenue } & 250 \\\text { Gross profit } & 75 \\\text { Operating profit } & 45 \\\text { Profit for the period } & 25\end{array}$$
From the information provide above,calculate the current ratio

A) 1.48:1
B) 2.44:1
C) 2:1
D) 1.77:1

Question 11

The price earnings ratio,dividend cover and dividend yield provide information on:

A) Stock market performance
B) Liquidity
C) Profitability
D) Utilization of assets

Question 12

The return on capital employed (ROCE)shows how "solvent" a company is

Question 13

Which of the following ratios considers the relationship between inventory and cost of sales?

A) Inventory turnover ratio
B) Trade payables ratio
C) Cost of sales turnover ratio
D) Trade receivables ratio

Question 14

A high price/earnings (P/E)ratio suggests:

A) Shareholders are pessimistic about future growth prospects
B) Shareholders are optimistic about future growth prospects
C) Earnings per share is high relative to the share price
D) Statements B and C are correct

Question 15

Which of the following rations considers the relationship between current assets and current liabilities?

A) Quick ratio
B) Current ratio
C) Capital gearing ratio
D) ROCE

Question 16

A gearing ratio of above 50% suggests:

A) The company is profitable
B) The company is over-reliant on borrowing
C) The company is financed mostly by equity
D) The company is almost bankrupt

Question 17

Which of the following rations considers the relationship between equity and long-term borrowing?

A) Quick ratio
B) Current ratio
C) Capital gearing ratio
D) ROCE

Question 18

The gearing ratio relates long-term borrowing to equity

Question 19

One way of assessing if debt is too high is to compare it with equity

Question 20

The following information is from the annual report of Thunderstruck Ltd:
Statement of financial position of Thunderstruck Ltd as at 31 December 201X

Income statement extract of Thunderstruck Ltd for the year ended 31 December 201X
$$\begin{array} { l r } \text { Revenue } & 250 \\\text { Gross profit } & 75 \\\text { Operating profit } & 45 \\\text { Profit for the period } & 25\end{array}$$
From the information provide above,calculate the debtors (trade receivables)ratio

A) 6.25 days
B) 58.4 days
C) 65.7 days
D) 16 days

Question 21

Which of the following statements is correct?

A) Shareholders motivated by the prospects of higher future share price growth tend to invest in companies with low dividend cover
B) Shareholders motivated by the prospects of higher future share price growth tend to invest in companies with a low P/E ratio
C) Shareholders who buy shares for a regular income tend to invest in companies with low dividend cover
D) Shareholders who buy shares for a regular income tend to invest in companies with high dividend cover

Question 22

If a company reported a profit for the year of £90m,share capital of £200m and a share price of £9.00 - what is the earnings per share (EPS)?

A) 20p per share
B) 10p per share
C) 45p per share
D) 22p per share

Question 23

If a company was interested in calculating how long it takes to receive payment from customers,which of the calculations would they make?

A) Trade receivables/sales revenue x 365
B) Sales revenue/trade receivables x 365
C) Trade payables/cost of sales x 365
D) Cost of sales/trade payables x 365

Question 24

If dividend per share remained the same but the share price increased,what effect would this have on dividend yield?

A) The earnings per share (EPS) component of dividend yield would increase
B) Dividend yield would not be effected
C) Dividend yield would increase
D) Dividend yield would decrease

Question 25

If a company reported a profit for the year of £90m,share capital of £200m and a share price of £9.00 - what is the price/earnings (P/E)ratio?

A) 20
B) 10
C) 45
D) 22