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Which of the following best describes the primary purpose of financial ratios in evaluating a firm?
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14. Financial Statement Analysis
Introduction to Ratios
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Which of the following ratios typically uses information that is not contained in the financial statements?
A
Gross profit margin
B
Debt-to-equity ratio
C
Market value ratios
D
Current ratio
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Understand the question: The problem is asking which ratio typically uses information not contained in the financial statements. To solve this, we need to analyze the components of each ratio mentioned.
Step 1: Gross profit margin is calculated using the formula: . Both gross profit and revenue are derived directly from the income statement, so this ratio uses information contained in the financial statements.
Step 2: Debt-to-equity ratio is calculated using the formula: . Both total debt and shareholders' equity are found on the balance sheet, so this ratio also uses information contained in the financial statements.
Step 3: Current ratio is calculated using the formula: . Both current assets and current liabilities are found on the balance sheet, so this ratio uses information contained in the financial statements.
Step 4: Market value ratios, such as price-to-earnings (P/E) ratio, often require market price per share, which is not included in the financial statements. This is why market value ratios typically use information not contained in the financial statements.
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