Multiple Choice
Which of the following ratios are components of the Return on Investment (ROI) formula, specifically when calculating Return on Assets (ROA)?
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14. Financial Statement Analysis
Ratios: Return on Assets (ROA)
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Which of the following is NOT typically considered an asset utilization ratio when analyzing Return on Assets (ROA)?
A
Current Ratio
B
Receivables Turnover
C
Fixed Asset Turnover
D
Inventory Turnover
Verified step by step guidance1
Understand the concept of Return on Assets (ROA): ROA measures how efficiently a company uses its assets to generate profit. Asset utilization ratios are used to analyze how effectively assets are being employed.
Identify the typical asset utilization ratios: These include Receivables Turnover, Fixed Asset Turnover, and Inventory Turnover. These ratios focus on how efficiently specific assets are being used in operations.
Define the Current Ratio: The Current Ratio is a liquidity ratio, not an asset utilization ratio. It measures a company's ability to pay short-term obligations using its current assets, rather than analyzing asset efficiency.
Compare the given options: Receivables Turnover, Fixed Asset Turnover, and Inventory Turnover are all asset utilization ratios, while the Current Ratio is not.
Conclude that the Current Ratio is NOT typically considered an asset utilization ratio when analyzing Return on Assets (ROA).
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