Professional in Human Resources (PHR) Practice Exam

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What are financial ratios used to describe?

  1. Compliance with legal standards

  2. Operational efficiency

  3. An organization's financial health and performance

  4. Market trends and forecasts

The correct answer is: An organization's financial health and performance

Financial ratios serve as key indicators of an organization's financial health and performance, providing a quantitative basis for evaluating its effectiveness in managing resources and generating profits. These ratios allow stakeholders, including management, investors, and creditors, to assess various aspects of the organization, such as liquidity, profitability, and solvency. By analyzing these ratios, stakeholders can gain insights into the company's operational efficiency, capital structure, and ability to meet its obligations. For example, the current ratio measures a company’s ability to cover short-term liabilities with its short-term assets, while the return on equity ratio reflects the profitability relative to shareholders' equity. Thus, financial ratios create a comprehensive view of the organization's overall financial status, enabling informed decision-making about investments or operational improvements.

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