- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 22. Understanding Balance Sheets
- Subject 5. Uses and Analysis of the Balance Sheet
CFA Practice Question
If a firm's ratio of current assets to current liabilities is lower than the industry average and its ratio of long-term debt to shareholder's equity is lower than the industry average, it would most likely indicate that the firm ______
A. has more current liabilities than the industry average.
B. has more leased assets than the industry average.
C. will be less profitable than the industry average.
Explanation: A firm's liquidity can be measured by the long-term debt to capital ratio = total long-term debt / total long-term capital, if a firm has a higher ratio than the industry average it is taking on more debt than the average. Another measurement of a firm's liquidity is current ratio = current assets / current liabilities; if a firm has a low current ratio it is taking on more debt. Long-term debt to shareholders equity is measured by using the debt to equity ratio; a higher percentage means that the firm is indeed taking on more debt than the industry average.
User Contributed Comments 1
| User | Comment |
|---|---|
| endurance | If CA/CL is lower than industry average, CL must be higher relative to CA. So that should be clear enough If long term debt/equity is lower, the CL fraction must also be higher relative to the company equity. |