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Question 1Financial analysis fundamentals

A company reports revenue of $500,000, cost of goods sold of $300,000, and operating expenses of $120,000. What is its operating margin?

  1. 24.0%
  2. 40.0%
  3. 60.0%
  4. 16.0% Correct answer.

Explanation

Operating profit equals revenue minus COGS minus operating expenses: $500,000 − $300,000 − $120,000 = $80,000. Dividing $80,000 by $500,000 gives an operating margin of 16.0%. Gross margin would be 40%, which excludes the operating expenses.

Question 2Financial analysis fundamentals

Which ratio best measures a firm's ability to meet short-term obligations using its most liquid current assets?

  1. Current ratio
  2. Quick ratio Correct answer.
  3. Inventory turnover
  4. Debt-to-equity ratio

Explanation

The quick ratio excludes inventory from current assets, so it captures coverage of current liabilities by cash, receivables, and marketable securities. The current ratio includes inventory and is therefore a broader, less stringent liquidity test.

Question 3Financial analysis fundamentals

On a common-size income statement, each line item is expressed as a percentage of which figure?

  1. Total assets
  2. Revenue Correct answer.
  3. Net income
  4. Shareholders' equity

Explanation

Common-size income statements scale every line to revenue, allowing comparison of cost structure across firms and periods of different size. Balance-sheet common sizing, by contrast, uses total assets as the base.

Question 4Financial analysis fundamentals

A firm's accounts receivable turnover falls from 8.0 to 6.0. What is the most direct interpretation?

  1. The firm collects receivables more slowly than before Correct answer.
  2. The firm's gross margin has improved
  3. The firm has reduced its inventory holdings
  4. The firm is carrying less debt

Explanation

Receivable turnover measures how many times receivables are collected in a period; a decline means each dollar of receivables sits outstanding longer. The average collection period, computed as 365 divided by turnover, rises correspondingly.

Question 5Financial analysis fundamentals

Which statement about the statement of cash flows is correct?

  1. Dividends received on equity investments are always operating cash flows
  2. Purchases of property are classified as operating activities
  3. Depreciation is reported as a cash outflow in investing activities
  4. Repayment of long-term debt appears in financing activities Correct answer.

Explanation

Financing activities capture transactions with capital providers, including debt issuance and repayment and equity issuance and buybacks. Property purchases are investing outflows, and depreciation is a non-cash add-back in the operating section under the indirect method.

Question 6Financial analysis fundamentals

A company has net income of $90,000, total assets of $600,000, and total equity of $300,000. What is its return on equity?

  1. 50.0%
  2. 30.0% Correct answer.
  3. 45.0%
  4. 15.0%

Explanation

Return on equity divides net income by average or period-end shareholders' equity: $90,000 / $300,000 = 30.0%. Return on assets would instead use total assets of $600,000 and equal 15.0%.

Question 7Financial analysis fundamentals

In DuPont analysis, return on equity is decomposed into which set of components?

  1. Operating margin, interest coverage, and tax rate
  2. Gross margin, current ratio, and debt ratio
  3. Net margin, asset turnover, and equity multiplier Correct answer.
  4. Asset turnover, quick ratio, and payout ratio

Explanation

The three-step DuPont identity multiplies net profit margin, total asset turnover, and the equity multiplier (assets divided by equity) to yield ROE. This shows whether returns come from profitability, efficiency, or leverage.

Question 8Financial analysis fundamentals

Which item would be classified as a non-current liability on the balance sheet?

  1. Deferred revenue to be recognized next quarter
  2. Accounts payable due in 45 days
  3. Accrued wages payable
  4. A bond maturing in seven years Correct answer.

Explanation

Non-current liabilities are obligations not expected to be settled within one year or the operating cycle. A bond maturing in seven years clearly falls beyond that horizon, while the other items settle within months.

Question 9Financial analysis fundamentals

A firm reports EBIT of $240,000 and interest expense of $60,000. What is its interest coverage ratio?

  1. 4.0 times Correct answer.
  2. 3.0 times
  3. 0.25 times
  4. 5.0 times

Explanation

Interest coverage equals EBIT divided by interest expense: $240,000 / $60,000 = 4.0 times. It indicates how many times operating earnings can absorb the interest burden before pre-tax income turns negative.

Question 10Financial analysis fundamentals

Under the indirect method, which adjustment is added back to net income when computing operating cash flow?

  1. A gain on the sale of equipment
  2. A decrease in accounts payable
  3. An increase in accounts receivable
  4. Depreciation expense Correct answer.

Explanation

Depreciation is a non-cash expense that reduced net income, so it is added back to reconcile net income to operating cash flow. Increases in receivables consume cash, and gains on asset sales are removed because the proceeds appear in investing activities.

Question 11Financial analysis fundamentals

A company's gross margin rises from 32% to 38% while its operating margin is unchanged. Which explanation is most consistent with these results?

  1. Cost of goods sold fell as a percentage of revenue while operating costs rose proportionally Correct answer.
  2. Operating expenses grew as a percentage of revenue
  3. The firm's tax rate increased sharply
  4. Inventory turnover declined

Explanation

A rising gross margin means COGS fell relative to revenue. If operating margin is flat, the gross-profit gain was offset by higher operating expenses as a share of revenue, leaving operating profit unchanged.

Question 12Financial analysis fundamentals

Which ratio would an analyst use to assess how efficiently a firm uses its total asset base to generate sales?

  1. Equity multiplier
  2. Dividend payout ratio
  3. Interest coverage
  4. Total asset turnover Correct answer.

Explanation

Total asset turnover equals revenue divided by average total assets and measures sales generated per dollar of assets. Higher values indicate more efficient asset utilization.

Question 13Financial analysis fundamentals

A firm with a current ratio of 2.0 uses cash to pay off a current liability. What happens to the current ratio?

  1. It increases Correct answer.
  2. It stays exactly the same
  3. It decreases
  4. It becomes equal to the quick ratio

Explanation

Paying a current liability with cash reduces both current assets and current liabilities by the same amount. When the current ratio exceeds 1.0, an equal reduction in numerator and denominator raises the ratio.

Question 14Financial analysis fundamentals

Which of the following is a limitation of ratio analysis when comparing two firms?

  1. Differences in accounting policies and fiscal year-ends can distort comparisons Correct answer.
  2. Ratios cannot be calculated from audited statements
  3. Ratios eliminate the need to read financial statement notes
  4. Ratios can only be computed for manufacturing firms

Explanation

Firms may use different inventory costing, depreciation, or revenue recognition policies, and differing fiscal calendars can misalign seasonal effects. Analysts must adjust or interpret ratios with these differences in mind.

Question 15Financial analysis fundamentals

A firm reports net income of $150,000 and 50,000 weighted-average diluted shares. It also has $20,000 of preferred dividends. What is diluted earnings per share?

  1. $3.00
  2. $4.00
  3. $3.40
  4. $2.60 Correct answer.

Explanation

Diluted EPS equals income available to common shareholders divided by diluted shares: ($150,000 − $20,000) / 50,000 = $2.60. Preferred dividends are subtracted because they are not available to common shareholders.

Question 16Financial analysis fundamentals

Which change would most likely increase a firm's return on equity, all else equal?

  1. Paying suppliers more quickly
  2. Issuing new common shares at book value
  3. Writing down obsolete inventory
  4. Replacing equity financing with debt financing Correct answer.

Explanation

Substituting debt for equity reduces the equity base and adds interest expense, but when operating returns exceed after-tax borrowing costs the smaller equity base lifts ROE. This is the leverage effect captured by the equity multiplier.

Question 17Financial analysis fundamentals

A company reports cash flow from operations of $400,000, capital expenditures of $150,000, and dividends paid of $50,000. What is its free cash flow to equity on this simple basis?

  1. $300,000
  2. $250,000
  3. $200,000 Correct answer.
  4. $400,000

Explanation

Free cash flow to equity is approximated as operating cash flow minus capital expenditures minus dividends: $400,000 − $150,000 − $50,000 = $200,000. This represents cash available after reinvestment and distributions.

Question 18Financial analysis fundamentals

Which pair of ratios would best reveal whether a firm's profitability is driven by margin or by volume of sales?

  1. Inventory turnover and days payable outstanding
  2. Debt-to-equity and interest coverage
  3. Current ratio and quick ratio
  4. Net profit margin and total asset turnover Correct answer.

Explanation

Net profit margin captures earnings per dollar of sales, while total asset turnover captures sales per dollar of assets. Together they form the DuPont profitability and efficiency components, showing whether returns come from margin or volume.

Question 19Financial analysis fundamentals

A firm's days sales outstanding rises from 40 to 55 days while revenue is flat. What is the most likely effect?

  1. The current ratio falls because receivables are written off
  2. Inventory turnover rises
  3. Gross margin improves because revenue is recognized sooner
  4. Cash is tied up in receivables and operating cash flow weakens Correct answer.

Explanation

Longer collection periods mean receivables grow even with flat revenue, absorbing cash and pressuring operating cash flow. Revenue recognition is unchanged, so margins are unaffected.

Question 20Financial analysis fundamentals

Which statement best describes the difference between EBITDA and operating income?

  1. EBITDA excludes depreciation and amortization, while operating income includes them Correct answer.
  2. EBITDA includes interest and taxes, while operating income excludes them
  3. EBITDA and operating income are always equal for capital-intensive firms
  4. Operating income excludes depreciation, while EBITDA includes it

Explanation

EBITDA adds back depreciation and amortization to earnings before interest and taxes, whereas operating income is after depreciation and amortization but before interest and taxes. Capital-intensive firms show the largest gap between the two.

Question 21Financial analysis fundamentals

A firm has a debt-to-equity ratio of 1.5 and total assets of $500,000. What is total equity?

  1. $150,000
  2. $333,333
  3. $250,000
  4. $200,000 Correct answer.

Explanation

With debt equal to 1.5 times equity, assets equal 2.5 times equity. Dividing $500,000 by 2.5 gives equity of $200,000 and debt of $300,000, which satisfies the 1.5 ratio.

Question 22Financial analysis fundamentals

A company reports a gain on the sale of a subsidiary within continuing operations. How should an analyst treat this gain when assessing sustainable operating performance?

  1. Exclude it as non-recurring and evaluate margins before the gain Correct answer.
  2. Reclassify it as revenue to reflect the subsidiary's contribution
  3. Treat it as a financing cash flow in the cash flow statement
  4. Include it in core operating margin because it appears in operating income

Explanation

Gains on asset or subsidiary sales are non-recurring and distort period comparisons, so analysts typically strip them out to assess sustainable margins. The cash proceeds are reported as investing activities, not financing.

Question 23Financial analysis fundamentals

A firm's return on assets is 8%, its net profit margin is 4%, and its equity multiplier is 2.0. What is its total asset turnover?

  1. 4.0 times
  2. 2.0 times Correct answer.
  3. 0.5 times
  4. 1.0 times

Explanation

ROA equals net profit margin multiplied by total asset turnover, so turnover equals 8% / 4% = 2.0 times. ROE would then be 8% × 2.0 = 16%, consistent with the equity multiplier.

Question 24Financial analysis fundamentals

Two firms report identical net income and total assets, but Firm A has a higher equity multiplier than Firm B. Which conclusion is most defensible?

  1. Firm A has a higher return on assets and lower financial risk
  2. Firm A has a higher return on equity and greater financial risk Correct answer.
  3. Firm B has a higher return on equity because it uses less debt
  4. Both firms must have identical return on equity

Explanation

A higher equity multiplier means more assets are financed by debt, which magnifies ROE when returns exceed borrowing costs but also raises financial risk. ROA is unaffected because net income and assets are identical.

Question 25Financial analysis fundamentals

A firm capitalizes a large expenditure that should have been expensed in the current period. What is the immediate effect on its reported financials?

  1. Current-period expenses are understated and assets are overstated Correct answer.
  2. Current-period expenses are overstated and assets are understated
  3. Operating cash flow is understated and investing cash flow is overstated
  4. Net income is understated and equity is understated

Explanation

Capitalizing an item that should be expensed defers the cost to future periods, so current expenses fall and assets rise, overstating near-term profit. The cash outflow is reclassified from operating to investing, which flatters operating cash flow.

Question 26Financial analysis fundamentals

An analyst is comparing two companies in the same industry and wants to remove the effect of differing capital structures and tax jurisdictions when comparing operating profitability. Which metric best accomplishes this?

  1. Net profit margin
  2. Earnings per share
  3. Operating margin (EBIT margin) Correct answer.
  4. Return on equity

Explanation

Operating margin measures EBIT as a share of revenue, so it is struck before interest and taxes and is therefore unaffected by how a firm is financed or taxed. That makes it the cleanest basis for comparing operating profitability across firms with different leverage and tax positions. Net-based measures such as ROE and net margin embed financing and tax effects.

Question 27Financial analysis fundamentals

A firm reports revenue of $2,000,000, cost of goods sold of $1,300,000, and operating expenses of $400,000. What is its operating margin?

  1. 35.0%
  2. 65.0%
  3. 15.0% Correct answer.
  4. 30.0%

Explanation

Operating income equals revenue minus COGS minus operating expenses: $2,000,000 - $1,300,000 - $400,000 = $300,000. Operating margin is operating income divided by revenue, or $300,000 / $2,000,000 = 15.0%. Gross profit margin would instead be 35.0% before operating expenses.

Question 28Financial analysis fundamentals

Which financial statement links the income statement to the balance sheet by explaining the change in retained earnings over a period?

  1. Notes to the financial statements
  2. Statement of financial position
  3. Statement of changes in equity Correct answer.
  4. Statement of cash flows

Explanation

The statement of changes in equity reconciles opening and closing equity, showing net income, dividends, and other equity movements such as share issuances. It is the formal bridge between the income statement result and the retained earnings balance reported on the balance sheet.

Question 29Financial analysis fundamentals

A company has total liabilities of $450,000 and total assets of $750,000. What is its liabilities-to-assets ratio?

  1. 167%
  2. 40%
  3. 60% Correct answer.
  4. 33%

Explanation

The liabilities-to-assets ratio divides total liabilities by total assets: $450,000 / $750,000 = 60%. This means 60% of the asset base is financed by debt claims, leaving 40% attributable to equity.

Question 30Financial analysis fundamentals

An analyst observes that a firm's inventory turnover has fallen from 8.0 to 5.0 while sales are unchanged. Which conclusion is most consistent with this observation?

  1. The firm is collecting receivables more slowly than before.
  2. The firm has increased its use of debt to finance operations.
  3. The firm has reduced its cost of goods sold, improving gross margin.
  4. The firm is carrying more inventory relative to its cost of goods sold, tying up working capital. Correct answer.

Explanation

Inventory turnover equals cost of goods sold divided by average inventory, so a decline from 8.0 to 5.0 with stable sales means average inventory has risen relative to COGS. The firm is holding more stock per unit of sales, which absorbs cash and lengthens the operating cycle.

Question 31Financial analysis fundamentals

A firm reports net income of $120,000, sales of $1,500,000, and average total assets of $800,000. Using the DuPont framework, what is its total asset turnover?

  1. 0.08
  2. 0.53
  3. 1.875 Correct answer.
  4. 6.67

Explanation

Total asset turnover equals sales divided by average total assets: $1,500,000 / $800,000 = 1.875. This component captures how intensively the asset base is used to generate revenue, separate from the margin earned on each dollar of sales.

Question 32Financial analysis fundamentals

A company reports operating cash flow of $300,000 and net income of $250,000. Which factor most likely explains why operating cash flow exceeds net income?

  1. A significant repayment of long-term debt during the period.
  2. A large increase in accounts receivable during the period.
  3. A decline in the deferred tax liability balance.
  4. Non-cash charges such as depreciation added back to net income. Correct answer.

Explanation

Under the indirect method, non-cash expenses such as depreciation and amortization are added back to net income, which can push operating cash flow above reported earnings. This add-back reflects that these charges reduced income without consuming cash in the period.

Question 33Financial analysis fundamentals

A firm's effective tax rate rises from 20% to 30% while pre-tax income is unchanged. What is the effect on net profit margin, all else equal?

  1. It is unchanged, because net profit margin is calculated before tax.
  2. It falls only if the gross margin also declines.
  3. It rises, because higher taxes increase operating efficiency.
  4. It falls, because a larger share of pre-tax income is paid in tax. Correct answer.

Explanation

Net profit margin is net income divided by revenue, and net income equals pre-tax income times one minus the tax rate. Raising the effective tax rate from 20% to 30% reduces net income for any given pre-tax amount, so the margin falls. Operating margin is unaffected because it is measured before tax.

Question 34Financial analysis fundamentals

Which adjustment is required when converting an accrual-based revenue figure to a cash-collected figure for the period?

  1. Add an increase in accounts receivable and subtract an increase in deferred revenue.
  2. Ignore both accounts because they are balance sheet items.
  3. Add an increase in deferred revenue and subtract an increase in accounts receivable. Correct answer.
  4. Add both an increase in accounts receivable and an increase in deferred revenue.

Explanation

Cash collected equals revenue adjusted for changes in receivables and deferred revenue. An increase in accounts receivable represents revenue recognized but not yet collected, so it is subtracted, while an increase in deferred revenue represents cash received before recognition, so it is added.

Question 35Financial analysis fundamentals

An analyst notes that a firm's gross margin is stable at 40% but its operating margin has fallen from 18% to 12%. Which explanation is most consistent with these figures?

  1. Selling, general, and administrative expenses have grown faster than sales. Correct answer.
  2. Cost of goods sold has risen sharply relative to sales.
  3. The firm has repaid a large portion of its debt.
  4. The firm has reduced its effective tax rate.

Explanation

A stable gross margin means the COGS-to-sales relationship has not changed, so the decline must come from below the gross profit line. Faster growth in operating expenses such as SG&A reduces operating income and therefore operating margin while leaving gross margin intact.

Question 36Financial analysis fundamentals

A firm has a current ratio of 1.5 and a quick ratio of 0.7. Which conclusion is best supported by the gap between these two ratios?

  1. The firm holds a large proportion of current assets in inventory. Correct answer.
  2. The firm's receivables collection period is very short.
  3. The firm is carrying substantial long-term debt.
  4. The firm has an unusually high level of accounts payable.

Explanation

The quick ratio excludes inventory from current assets, so a large gap between the current and quick ratios indicates that inventory makes up a significant share of current assets. With a current ratio of 1.5 but a quick ratio of only 0.7, inventory accounts for well over half of the current asset base.

Question 37Financial analysis fundamentals

A firm reports EBITDA of $500,000, depreciation and amortization of $120,000, and interest expense of $80,000. What is its interest coverage based on EBIT?

  1. 1.50x
  2. 5.00x
  3. 4.75x Correct answer.
  4. 6.25x

Explanation

EBIT equals EBITDA minus depreciation and amortization: $500,000 - $120,000 = $380,000. Interest coverage is EBIT divided by interest expense, or $380,000 / $80,000 = 4.75x. Using EBITDA instead would overstate coverage by ignoring the depreciation charge.

Question 38Financial analysis fundamentals

A firm reports a net loss of $40,000, depreciation of $90,000, an increase in accounts payable of $25,000, and capital expenditures of $60,000. What is its free cash flow to the firm on a simple operating-cash-flow-less-capex basis?

  1. $15,000 Correct answer.
  2. $75,000
  3. $135,000
  4. $55,000

Explanation

Operating cash flow starts with the net loss of $40,000, adds back $90,000 of depreciation, and adds the $25,000 increase in payables, giving $75,000. Free cash flow subtracts capital expenditures of $60,000, leaving $15,000.

Question 39Financial analysis fundamentals

Two firms report the same net income and the same total assets, but Firm A has a higher equity multiplier than Firm B. Which statement is correct?

  1. Firm A has a lower return on equity because higher leverage raises interest costs.
  2. Firm A has a higher return on equity than Firm B, with identical return on assets. Correct answer.
  3. Firm A has a higher return on equity and lower return on assets than Firm B.
  4. Firm A and Firm B have identical return on equity because net income is the same.

Explanation

Return on assets equals net income divided by total assets, so identical net income and assets give identical ROA for both firms. Because ROE equals ROA multiplied by the equity multiplier, the firm with the higher multiplier, Firm A, must have the higher ROE.

Question 40Financial analysis fundamentals

A company changes its estimate of the useful life of its equipment, extending it from five to eight years. Which immediate effect should the analyst expect, all else equal?

  1. Higher annual depreciation expense and lower operating income.
  2. An immediate write-down of the equipment to its fair value.
  3. Lower annual depreciation expense and higher operating income. Correct answer.
  4. No effect on depreciation because useful life is a cash item.

Explanation

Extending the estimated useful life spreads the depreciable cost over more years, reducing annual depreciation expense. Because depreciation is an operating expense, lower depreciation raises operating income and, in turn, net income for the period.

Question 41Financial statement analysis

Under IFRS, which financial statement reports an entity's assets, liabilities, and equity at a specific point in time?

  1. Statement of financial position Correct answer.
  2. Statement of cash flows
  3. Statement of changes in equity
  4. Statement of profit or loss

Explanation

The statement of financial position presents assets, liabilities, and equity as of a single reporting date, so it is a point-in-time statement. The other statements cover a period or reconcile movements rather than showing the closing balances of assets and liabilities.

Question 42Financial statement analysis

A company reports current assets of 480,000 and current liabilities of 300,000. What is its current ratio?

  1. 1.80
  2. 1.60 Correct answer.
  3. 0.63
  4. 2.60

Explanation

The current ratio equals current assets divided by current liabilities, so 480,000 / 300,000 = 1.60. It measures short-term liquidity by showing how many units of current assets cover each unit of current liabilities.

Question 43Financial statement analysis

Which item is classified as a non-current liability on a classified statement of financial position?

  1. A bank loan repayable in five years Correct answer.
  2. Trade payables due in 45 days
  3. A prepayment made to a supplier
  4. Accrued wages payable

Explanation

Non-current liabilities are obligations not expected to be settled within twelve months of the reporting date. A loan repayable in five years meets that criterion, whereas payables and accruals due within the operating cycle are current.

Question 44Financial statement analysis

An entity reports revenue of 2,000,000, cost of sales of 1,250,000, and operating expenses of 400,000. What is its operating profit margin?

  1. 17.5% Correct answer.
  2. 62.5%
  3. 20.0%
  4. 37.5%

Explanation

Operating profit is 2,000,000 minus 1,250,000 minus 400,000, which equals 350,000. Dividing 350,000 by revenue of 2,000,000 gives an operating margin of 17.5%.

Question 45Financial statement analysis

Which cash flow is classified as an investing activity under IAS 7?

  1. Cash received from customers
  2. Proceeds from issuing shares
  3. Dividends paid to shareholders
  4. Purchase of property, plant and equipment Correct answer.

Explanation

Investing activities comprise the acquisition and disposal of long-term assets and other investments not held for trading. Buying property, plant and equipment is the classic example, while customer receipts are operating and share issuance is financing.

Question 46Financial statement analysis

A company has net income of 90,000, preference dividends of 10,000, and 40,000 weighted average ordinary shares. What is basic earnings per share?

  1. 2.00 Correct answer.
  2. 2.25
  3. 2.50
  4. 1.75

Explanation

Basic EPS equals profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares. Profit after deducting preference dividends is 80,000, so 80,000 / 40,000 = 2.00.

Question 47Financial statement analysis

What does a vertical (common-size) analysis of the statement of profit or loss express each line item as?

  1. A multiple of the industry average
  2. A percentage of revenue Correct answer.
  3. A percentage of total assets
  4. A percentage change from the prior year

Explanation

Vertical analysis sets each line within a single statement against a common base. For the statement of profit or loss the base is normally revenue, so every item is shown as a percentage of revenue.

Question 48Financial statement analysis

Which qualitative characteristic requires financial information to be capable of making a difference in users' decisions?

  1. Relevance Correct answer.
  2. Timeliness
  3. Comparability
  4. Verifiability

Explanation

Relevance is the fundamental qualitative characteristic under which information must be capable of influencing decisions, either through predictive or confirmatory value. Comparability, timeliness, and verifiability are enhancing characteristics.

Question 49Financial statement analysis

An entity reports inventory of 200,000 and cost of sales of 1,460,000. Using a 365-day year, what is its inventory turnover period in days?

  1. 40 days
  2. 60 days
  3. 50 days Correct answer.
  4. 73 days

Explanation

The inventory holding period equals average inventory divided by cost of sales, multiplied by 365. Applying 200,000 / 1,460,000 x 365 gives approximately 50 days.

Question 50Financial statement analysis

A company reports profit before interest and tax of 600,000 and interest expense of 150,000. What is its interest coverage ratio?

  1. 2.00 times
  2. 0.25 times
  3. 4.00 times Correct answer.
  4. 5.00 times

Explanation

Interest cover equals profit before interest and tax divided by the interest expense, so 600,000 / 150,000 = 4.00 times. It indicates how many times operating profit can absorb the finance cost.