Financial Analysis

Question 0

What does Spread • Net Financial leverage means?

Answer 0

It is to see whether firm is making efficient use of leverage or not.
Spread clearly shows that debt only works when ROIC>after tax cost of debt

Question 1

What does NOPAT margin • NOA turnover means?

Answer 1

The multiplication is ROIC figure.

This breaks down the source of operating outperformance, margin or turnover?

Question 2

What is ROIC?

Answer 2

It is a measure of how profitably a company is able to deploy its operating assets(funded by shareholders and lenders)

Question 3

Are the profit margins changing? What should you check if it is changing?

Answer 3

Is the margin consistent with firms strategy low cost vs differentiation

How severe is competition?
Increasing input cost?
Poor overhead management?
Brand magnitude?

Question 4

NWC turnover - what does it mean?

Answer 4

Means how many €s of sales a firm is able to generate from each € invested in working capital

Question 5

Formula?
Receivable turnover
Receivable days
Inventory turnover
Inventory days
Payables turnover
Payables days

Answer 5

Receivable turnover
=sales/receivables

Receivable days=
Receivable / (sales/360)

Inventory turnover =
COGS/inventory

Inventory days =
Inventory / (COGS/360)

Payables turnover =
COGS/payables

Payables days =
Payables/(COGS/360)

Question 6

CCC formula

Answer 6

CCC=inventory days + receivable days - payable days

Question 7

What ratio analysis should you use in the exam?

Answer 7

Margin analysis:
Gross margin
Operating margin
Net margin
Tax rate

Yoy growth:
Sales growth
Net profit growth

Working capital management:
NWC
NWC/sales
NWC turnover
Receivables turnover
Inventory turnover
Payables turnover
Receivables days
Inventory days
Payable days

Long term capital management:
NFA turnover
PPE turnover

Short term liquidity:
Current ratio
Quick ratio
Cash ratio

Solvency:
Debt / Capital
Net debt / Capital
Interest cover (earnings)
Interest cover (cash flow)

Question 8

Formula ?
Current ratio
Quick ratio
Interest cover(earnings)

Answer 8

Current ratio >1 indicates Good
Current asset / current liability

Quick ratio >1 good but >0.8 is ok
(Cash+receivables)/current liability

Interest cover (earning)
= EBIT/ interest expense