19.6. Summary

Try these first

1. 1.

   What do liquidity ratios measure?

   Hint

   Think about obligations due soon.

2. 2.

   Define profitability ratios.

   Hint

   Consider profit in relation to sales.

3. 3.

   What do liquidity ratios assess?

   • Long-term obligations
   • Ability to meet short-term obligations
   • Profitability

   Hint

   Consider what obligations need to be met soon.

4. 4.

   True or False: Higher profitability ratios indicate a less efficient company.

   • True
   • False

   Hint

   Think about what profit relative to sales indicates about efficiency.

5. 5.

   A company has a current asset of $500,000 and current liabilities of$300,000. Another company in the same industry has a current asset of $200,000 and current liabilities of$100,000. Which company is in a better liquidity position? Explain your reasoning.

   Hint

   Use the current ratio formula to calculate.

6. 6.

   If a company's total debt is $600,000 and its equity is$400,000, what is its debt-to-equity ratio? Discuss the implications of this ratio in terms of financial risk.

   Hint

   Think about how debt influences overall company financial stability.