CFA Practice Question

There are 534 practice questions for this study session.

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.
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