05

Question 1

What is vertical analysis?

Answer 1

Vertical Analysis converts financial statement information to ratio form:
- Income statement items as % of net sales
- Balance sheet items as % of total assets
Purpose: Facilitates comparison across companies and accounts.

Question 2

What is horizontal analysis?

Answer 2

Examines changes in financial data across time to:

• Analyse performance
• Predict future performance

Formula: [(Second year amount - Base year amount) / Base year amount] x 100

Question 3

Define Return on Equity (ROE)

Answer 3

• Measures profitability from shareholder investment
• Formula: Net income / Average stockholders’ equity
• Indicates company performance effectiveness

Question 4

How is ROA (Return on Assets) calculated?

Answer 4

• Evaluates profit earned on each dollar of assets
• Formula: Earnings without interest expense / Average total assets
• Insight: Operational efficiency without financing effects

Question 5

What does Return on Financial Leverage (ROFL) signify?

Answer 5

• Gauges financial leverage impact on ROE
• Formula: ROE - ROA
• High ROFL indicates strong use of debt to enhance ROE

Question 6

Explain DuPont Analysis of ROA

Answer 6

Disaggregates ROA into:

• Profit Margin (PM): Earnings before interest / Sales revenue
• Asset Turnover (AT): Sales revenue / Average total assets
• Purpose: Reveals profitability & efficiency.

Question 7

Define Profit Margin (PM)

and what is it affected by?

Answer 7

Measures profit generated from each dollar of sales. Affected by:
- Gross profit level
- Operating expenses
- Competition & pricing control

Question 8

Define Asset Turnover (AT)

Answer 8

Reflects productivity by sales per dollar of assets. Improved by:
- Increasing sales revenue
- Reducing assets

Question 9

What is Gross Profit Margin (GPM)?

Answer 9

• % of sales left after product costs
• Formula: (Sales - Cost of goods sold) / Sales revenue
• Indicates cost control effectiveness

Question 10

What is Expense-to-Sales (ETS) Ratio?

Answer 10

• % of sales spent on expenses
• Formula: Expense / Sales revenue
• Useful for managing specific cost categories

Question 11

Describe Accounts Receivable Turnover (ART)

Answer 11

• Assesses receivable collection rate
• Formula: Sales revenue / Average accounts receivable
• High ART suggests efficient receivable collection

Question 12

What does Inventory Turnover (INVT) measure?

Answer 12

Inventory Turnover (INVT) assesses inventory sales rate:
Formula: Cost of goods sold / Average inventory
High INVT indicates efficient inventory management

Question 13

Explain Property, Plant & Equipment Turnover (PPET)

Answer 13

PP&E Turnover (PPET) gauges asset utilisation:
Formula: Sales revenue / Average PP&E
Insight: Operational efficiency in using fixed assets

Question 14

What is the Current Ratio?

Answer 14

Current Ratio measures short-term liquidity:
Formula: Current assets / Current liabilities
Higher Ratio implies better liquidity

Question 15

What is Working Capital?

Answer 15

Working Capital is the excess of current assets over current liabilities:
Positive working capital indicates more short-term inflows than outflows

Question 16

Define the Quick Ratio

Answer 16

Quick Ratio evaluates liquidity excluding inventory:
Formula: (Cash + Short-term securities + Receivables) / Current liabilities
Shows readiness to meet immediate obligations

Question 17

Explain Operating Cash Flow to Current Liabilities (OCFCL)

Answer 17

OCFCL relates operating cash to current liabilities:
Formula: Cash flow from operations / Average current liabilities
Insight: Company’s debt repayment ability from operations

Question 18

Define Debt-to-Equity Ratio

Answer 18

Debt-to-Equity Ratio shows reliance on debt vs. equity financing:
Formula: Total liabilities / Stockholders’ equity
Higher ratios indicate increased risk and lower solvency

Question 19

What is Times Interest Earned (TIE)?

Answer 19

Times Interest Earned (TIE) shows earnings to interest expense ratio:
Formula: EBIT / Interest expense
Higher TIE indicates lower risk of default