4. Yields & Ratios

Question 0

What relationship does asset turnover look at?

Answer 0

The relationship between sales and the capital employed in a business. It describes how efficiently a company is generating sales by looking at how hard a company’s assets are working.

Question 1

What is ROCE?

Answer 1

ROCE is a key measure of a company’s profitability and looks at the returns that have been generated from the total capital employed in a company - that is, debt as well as equity.

Question 2

What is profit margin?

Answer 2

How much profit is being made for each pound’s worth of sales.

Question 3

What does asset turnover measure?

Answer 3

How efficiently the company’s assets have been utilised over the accounting period.

Question 4

What does profit margin measure?

Answer 4

How effective its price and cost management has been in the face of industry competition.

Question 5

What does the gross profit margin show?

Answer 5

The profit a company makes after paying for the cost of goods sold. It shoes how efficient the management is in using its labour and raw materials in the process of production.

Question 6

What does the operating profit show?

Answer 6

How efficiently management is using business operations to generate profit.

Question 7

What is the difference between gross and operating profit margin?

Answer 7

The gross profit margin accounts for just the goods sold, whereas the operating profit margin accounts for the cost of goods sold and administrated/selling expenses.

Question 8

What is the net profit margin?

Answer 8

This analyses profitability further by taking into account interest and taxation.

With net profit margin ratio all costs are included to find the final benefit of the income of a business and so measures how successful a company has been at the business of making a profit on each sale.

It is one of the most essential ratios.

Question 9

What are debt ratios used for?

Answer 9

To determine the overall financial risk that a company and its shareholders face. The greater the amount of debt that a company has, the greater the risk of bankruptcy.

Question 10

What does a company’s financial gearing (alternatively called leverage) describe?

Answer 10

Its capital structure, or the ratio of debt to equity capital it employs.

Question 11

What does an interest cover of less than 1.5 indicate?

Answer 11

It’s ability to meet interest expenses may be questionable.

Question 12

What are the two ratio/tests used to assess a company’s liquidity?

Answer 12

Current ratio

Acid test

Question 13

What does it imply if a company’s z-score is negative?

Answer 13

This implies that a company’s insolvency is imminent

Question 14

What are the three measures of the profitability of a company expressed as an amount per share?

Answer 14

Earnings per share - EPS
Earnings before interest and tax (EBIT)
Earnings before interest, tax, depreciation and amortisation (EBITDA)

Question 15

What does the PE Ratio measure?

Answer 15

Measures how highly investors value a company in its ability to grow its income stream

Question 16

What does it show if a PE Ratio is high or low?

Answer 16

High = investors expect the company to achieve above-average growth.

Low = investors expect the company to achieve below-average growth in its future earnings.

Question 17

What does the price to book ratio measure?

Answer 17

The relationship between the company’s share price and the net book, or asset value per share attributable to its ordinary shareholders.

Question 18

What would happen if a company had a P/B Ratio of less than three?

Answer 18

It would attract the attention of value investors as it could signal that the stock is undervalued.