Question

Which of the following ratios works well as a red flag for reporting problems and financial performance?

-Return on assets and price earnings.
-Return on assets and return on equity.
-Gross margins and return on equity.
-None of the above.

Answer 1

The appropriate financial ratios that could serve as red flags for issues in financial performance are gross margins and return on equity. However, none of the options given pairs these two ratios together, so the correct answer is 'None of the above.'

Step-by-step explanation:

The question pertains to identifying which combination of financial ratios might serve as a red flag for reporting problems and financial performance. When analyzing a company's financial health, the ratios typically scrutinized are those that reflect profitability, efficiency, and leverage.

Specifically, gross margins and return on equity (ROE) are crucial. Gross margins reflect the company's efficiency in producing goods, while ROE measures how effectively the company is using its equity to generate profits.

If there are significant deviations from industry norms or historical trends in these ratios, they can be red flags indicating potential issues. However, the options provided do not pair these two ratios together.

Therefore, the correct answer to the question is 'None of the above.'