Multiple Choice
Which type of financial analysis is most directly facilitated by the use of ratios when examining comparative balance sheets?
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14. Financial Statement Analysis
Introduction to Ratios
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following is a profitability ratio?
A
Debt to Equity Ratio
B
Quick Ratio
C
Current Ratio
D
Return on Equity (ROE)
Verified step by step guidance1
Understand the concept of profitability ratios: Profitability ratios measure a company's ability to generate profit relative to its revenue, assets, equity, or other financial metrics. They are key indicators of financial performance.
Review the given options: Debt to Equity Ratio, Quick Ratio, and Current Ratio are not profitability ratios. Debt to Equity Ratio is a leverage ratio, Quick Ratio is a liquidity ratio, and Current Ratio is also a liquidity ratio.
Identify the correct answer: Return on Equity (ROE) is a profitability ratio. It measures the ability of a company to generate profit from its shareholders' equity.
Understand the formula for ROE: ROE is calculated as \( \text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \). This formula shows how effectively the company is using its equity to generate profit.
Apply the concept: When analyzing financial statements, use ROE to assess the company's profitability and compare it with industry benchmarks or competitors.
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