ARA ratios

Question 1

Horizontal Analysis

Answer 1

Compares reported amounts across different periods to identify change by SIGNIFICANCE and MAGNITUDE

Question 2

Absolute change

Answer 2

(Reported amount in current period)-(Reported amount in previous period)

Question 3

Relative change (%)

Answer 3

[(Reported amount in current period)-(Reported amount in previous period)]/Reported amount in previous period

Question 4

Trend analysis

Answer 4

Uses time series data to analyse past performance as a means to predict future performance

Select a base year that is not ‘atypical’
Assign value of 100
Express all years in relative terms

Question 5

ROE

Answer 5

Return to ordinary S.H

Higher=Better

[(Profit available to Ord. S.H)/(Avg of Ord. S.H’s Equity or Tot Equity)]*100

Question 6

What causes ROE to increase

Answer 6

Increase in profit
- Increase in revenue
- Decrease in expense

Decrease in equity
- Share buybacks
- Dividends

Question 7

ROA

Answer 7

Ability to use resources to produce returns

Higher=better

[(EBIT)/Avg Tot Assets]*100

Question 8

What causes ROA to increase

Answer 8

Increase in EBIT
- Increase in revenue
- Decrease in expense (exclude interest and tax)

Decrease in Tot Assets
- Diposals
- Depreciation & Amortisation
- Impairment

Question 9

Gross profit margin

Answer 9

Indicator of mark-up
rate at which sales generate revenue

(Gross Profit/Sales Revenue)*100

Question 10

EBIT profit margin

Answer 10

Rate at which sales generate EBIT

(EBIT/Sales Revenue)*100

Question 11

What causes profit margin to increase

Answer 11

Increase in Revenue
- Increase in selling Price
- Increase in vol of sales
- Elasticity of demand

Increase in Mark up
- Increase in selling price
- Decrease in cost of sales

Decrease in expenses
- Efficiency

Question 12

Expense ratio

Answer 12

Rate at which sales revenue is absorbed by a specific expense

[(Selling & (insert line item SoP/L ) Expense)/Sales Revenue]*100

Question 13

What can decrease Expense ratio

Answer 13

Increase in revenue

Question 14

Cash Flow to Sales Ratio

Answer 14

Rate at which sales revenue generates operating CF

(Net Operating CF/Sales Revenue)*100

Question 15

What causes CF to Sales ratio to increase

Answer 15

Increase in operating inflows
Decrease in operating outflows

Question 16

Asset Turnover

Answer 16

Indicates effectiveness of entity’s assets to generate sales rev, how well an entity is managing its sales investment in current and non-current assets

Sales Rev/Avg Tot Assets=n time p.a

Question 17

What causes ATO to increase

Answer 17

Increase in sales rev
Decrease in avg assets

Question 18

What is the relationship between Profit Margin, ATO and ROA

Answer 18

PM *ATO=ROA

Increase in ROA=Increase in PM or ATO

PM and ATO are inversely related

Question 19

Inventory Turnover/Days Inventory

Answer 19

Avg no. of days inventory is held

(Avg Inventory * 365)/Cost of Sales

Question 20

What causes improvement in Inventory Turnover

Answer 20

Sell more
Sell quicker
Hold less

Question 21

Days sales outstanding

Answer 21

A measure of asset efficiency; no. of day b/w sale and cash receipt

(Avg Trade Receivables *365)/Sales Revenue

Question 22

What causes improvement in days sales outstanding

Answer 22

Reduced credit terms
Discounts on prompt payment
Improve screening/collection procedure

Question 23

Days Purchases outstanding

Answer 23

Avg time to pay for inventory purchases

(Avg Trade Payable*365)/(Cost of Sales + Net increase in Inventory)

Question 24

What causes changes in Days Purchases outstanding

Answer 24

Changes in CF
Changes in suppliers credit terms

Question 25

Current Ratio/Working Capital Ratio

Answer 25

CA/CL (either as ratio or %)

Question 26

What causes increase in current ratio

Answer 26

Increase in CA - Cash injection - Increase in inventory turnover - Liquidate NCA Decrease in CL - Decrease in payables - Defer loans to NC

Question 27

Quick Ratio

Answer 27

Amount of quick assets to service CL (Cash + Receivables)/(CL-Overdrafts) (either as ratio or %) Removes: - Inventory (takes longer to convert to cash) - Prepayments (Future economic Benefit isn't CF) - Overdrafts (ongoing source of funding)

Question 28

What causes increase in quick ratio

Answer 28

Increase in CA Decrease in CL

Question 29

CF ratio

Answer 29

Amount of OCF to service CL (Net operating CF or CGO)/CL=n times better than current ratio

Question 30

Debt Ratio

Answer 30

Extent to which entity has used debt to finance its investment in assets Tot L/Tot A (%)

Question 31

What are alternatives to Debt Ratio

Answer 31

Equity Ratio=100%-Debt Ratio=Tot Eq/Tot A Debt to Equity Ratio=Tot L/Tot Eq

Question 32

What causes Debt Ratio to increase

Answer 32

Increase in borrowings Decrease in Eq Decrease in A

Question 33

Interest Coverage Ratio/Times interest earned

Answer 33

Ability for entity to generate earning to cover finance costs EBIT/Finance Costs=n times

Question 34

What causes interest coverage ratio to increase

Answer 34

Increase in EBIT Decrease in interest expense - Decrease interest rates - Decrease in borrowings

Question 35

What does a high interest coverage ratio mean

Answer 35

Insufficient use of leverage Efficient generation of returns

Question 36

Debt coverage ratio

Answer 36

Entity's ability to remain solvent for the long term Ability to pay off long term debt at current operation lvl=lower is better NCL/NOCF= n times

Question 37

Net tangible Asset Backing Ratio

Answer 37

Book value of entity's Net tangible assets per ord. share (Ord's S.H's equity- Intangibles)/(Weighted Avg no. of Ord. Shares) = n cents per share

Question 38

If NTAB > Share Price, what is wrong

Answer 38

undervalued pessimistic view on realisable value

Question 39

Earnings per Share

Answer 39

Accounting profit from each share (Profit available to Ord. S.H)/Weight Avg no. of Ord Shares= n cents per share Ability to meet dividends and fund reinvestment NOCF/Weight avg no of Ord. shares= n cents

Question 40

Dividend Payout Ratio

Answer 40

Percentage as profits distributed as dividends Dividends/Profit or DPS/EPS Investors looking for income=>High ratio Investors looking of capital growth=>Low ratio

Question 41

Price Earnings Ratio

Answer 41

NO. of years of earnings the market is prepared to pay for entity's shares High ratio=High confidence Current Market Price/EPS=n times

Question 42

What are SoP/L line items expressed in terms on in vertical analysis

Answer 42

Sales or Revenue

Question 43

Vertical analysis

Answer 43

Involves comparing line items to a base item (normally largest) within the same statement

Question 44

What are SoFPos line items expressed in terms of vertical analysis

Answer 44

Tot assets

Question 45

When a ratio is between a stock (A, L, Eq) and a flow (Rev, Exp, Profit, CF)

Answer 45

Take an average

Question 46

Mark-up

Answer 46

(Gross profit/Cost of sales) * 100

Question 47

Avg interest rate

Answer 47

Finance costs/Avg borrowings (C) or Interest bearing L (NC)