Answer = c: Shareholders are interested in the return a business generates on the money the shareholder has invested. Therefore, answer c – Return on Equity is correct. Shareholders tend to focus on long term returns vs. managers who focus on profitability. Answer a – Profit Margin would be more applicable to Managers. Financial Managers and people interested in assessing risk would be interested in b – Debt to Equity. Mangers, primarily interested in inventory management, would be interested in d – Inventory Turnover.
If sales are $ 600,000 and assets are $ 400,000, then asset turnover is:
.67
1.50
2.00
3.50
Answer = b: The British often refer to sales as turnover since the ultimate reason a business invests in assets is to turn over the asset dollar into a sales dollar. If we divide sales of $ 600,000 by $ 400,000 we get 1.5 – answer is thus b. Average assets is often used in the denominator of the ratio. This tells us for every $ 1.00 we invested into assets, we were able to turn this into $ 1.50 of sales.
An extremely high current ratio implies:
Management is not investing idle assets productively.
Current assets have been depleted and the company is insolvent.
Total assets are earning a very low rate of return.
Current liabilities are higher than current assets.
