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)

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Answer 3

• Measures profitability from shareholder investment
• Indicates company performance effectiveness

Question 4

How is ROA (Return on Assets) calculated?

to be deleted, formula on sheet

Answer 4

• Evaluates profit earned on each dollar of assets
• Insight: Operational efficiency without financing effects

Question 5

What does Return on Financial Leverage (ROFL) signify?

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Answer 5

• Gauges financial leverage impact on ROE
• 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)
• Asset Turnover (AT)
• 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)

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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)?

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Answer 9

• % of sales left after product costs
• Indicates cost control effectiveness

Question 10

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

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Answer 10

• % of sales spent on expenses
• Useful for managing specific cost categories

Question 11

Describe Accounts Receivable Turnover (ART)

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Answer 11

• Assesses receivable collection rate
• High ART suggests efficient receivable collection

Question 12

What does Inventory Turnover (INVT) measure?

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Answer 12

Inventory Turnover (INVT) assesses inventory sales rate.
High INVT indicates efficient inventory management

Question 13

Explain Property, Plant & Equipment Turnover (PPET)

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Answer 13

PP&E Turnover (PPET) gauges asset utilisation.
Insight: Operational efficiency in using fixed assets

Question 14

What is the Current Ratio?

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Answer 14

Current Ratio measures short-term liquidity:
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

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Answer 16

Quick Ratio evaluates liquidity excluding inventory:
Shows readiness to meet immediate obligations

Question 17

Explain Operating Cash Flow to Current Liabilities (OCFCL)

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Answer 17

OCFCL relates operating cash to current liabilities:
Insight: Company’s debt repayment ability from operations

Question 18

Define Debt-to-Equity Ratio

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Answer 18

Debt-to-Equity Ratio shows reliance on debt vs. equity financing:
Higher ratios indicate increased risk and lower solvency

Question 19

What is Times Interest Earned (TIE)?

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Answer 19

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