Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Introduction to Ratios

Financial Accounting

14. Financial Statement Analysis

Introduction to Ratios

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Multiple Choice

Which of the following ratios might be used to estimate the value of a stock?

Inventory Turnover Ratio

Current Ratio

Debt-to-Equity Ratio

Price-to-Earnings (P/E) Ratio

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Verified step by step guidance

Understand the purpose of the question: The goal is to identify which financial ratio is commonly used to estimate the value of a stock. Ratios like Inventory Turnover, Current Ratio, and Debt-to-Equity Ratio are not directly related to stock valuation, but the Price-to-Earnings (P/E) Ratio is specifically designed for this purpose.

Learn the definition of the Price-to-Earnings (P/E) Ratio: The P/E Ratio is calculated as the market price per share divided by the earnings per share (EPS). It is used to evaluate whether a stock is overvalued or undervalued relative to its earnings potential.

Understand the application of the P/E Ratio: Investors use the P/E Ratio to compare the valuation of a company’s stock to its peers or the industry average. A higher P/E Ratio may indicate that the stock is overvalued, while a lower P/E Ratio may suggest undervaluation.

Recognize why other ratios are not suitable for stock valuation: Inventory Turnover Ratio measures how efficiently a company manages its inventory, Current Ratio assesses liquidity, and Debt-to-Equity Ratio evaluates financial leverage. These ratios are important for operational and financial analysis but do not directly estimate stock value.

Conclude that the Price-to-Earnings (P/E) Ratio is the correct answer for estimating the value of a stock, as it directly relates the stock price to the company’s earnings performance.