.1 Which of the following ratios are key components in measuring a company\'s op
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.1 Which of the following ratios are key components in measuring a company's operating efficiency? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) Profit margin Equity ratio Return on total assets Total asset turnover 1.2 Which ratio summarizes the components applicable in 1.1? Debt ratio Total asset turnover Profit margin Return on total assetsExplanation / Answer
Ratio analysis is a widely used tool to assess the financial position of company in terms of liquidity, solvency and profitability. There are various ratios like current ratio, liquidity ratio which helps to determine how soon a firm can meet its short term obligations by using its current assets. Similarly, various debt ratios assess the firm’s ability to pay interest regularly and installment of principal amount on due date.
1.1) Profit margin and total asset turnover ratios are key components in measuring a company's operating efficiency. Operational efficiency measures the efficiency of firm with which it is utilizing its assets to generated revenue.
Profit margin ratio measures the relationship between sales and profit. It is also known as gross profit ratio. It indicates the gross profit generated by sale of goods. The gross profit ratio is calculated by dividing gross profit by total sales.
Total asset turnover ratios measures the efficiency of firm to generate sales by using total assets. It is calculated by dividing net sales by its average total assets. If ratio is higher it means that company is able to generate more sales with less assets which is good.
1.2) Return on total assets summarizes the components applicable in point 1.1. This ratio measures the efficiency of company in using the assets to generated profits before paying any contractual obligations like interest and taxes. It is calculated by dividing earnings before interest and tax by total net assets.
2) Working capital measures the difference between current assets and current liabilities. It is not a ratio but it measures the liquidity position of the company. It shows that how much current assets are there with company to pay the current liabilities. In other words, it measures a firm's ability to pay off its current liabilities with current assets.
3) Days' sales uncollected and Accounts receivable turnover ratios measure how frequently a company collects its accounts. Days' sales uncollected measures the number of days before which receivables can be collected. It is used by creditors to determine short-term liquidity of the company. Accounts receivable ratio measures the efficiency of the firm with which it can collect the amount from debtors. It shows that how quickly receivables/ debtors can be converted into cash.
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