Financial Analysis Techniques

Question 1

What is “Return on Assets” (ROA)?

Answer 1

A profitability ratio calculated as net income divided by average total assets;

indicates a company’s net profit generated per dollar invested in total assets.

Question 2

What is “Common-Size” Analysis?

Answer 2

The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences.

Question 3

What is “Cross-Sectional Analysis”?

Answer 3

Also called relative analysis.

It’s an analysis that involved comparisons across individuals in a group over a given time period or at a given point in time.

Question 4

What are “Activity Ratios”?

Answer 4

Ratios that measure how well a company is managing key current assets and working capital over time.

Question 5

What are “Profitability Ratios”?

Answer 5

Ratios that measure a company’s ability to generate profitable sales from its resources (assets).

Question 6

What are “Asset Utilization Ratios”?

Answer 6

Ratios that measure how efficiently a company uses its assets to generate revenues and other economic benefits.

Question 7

What are “operating efficiency ratios”?

Answer 7

Measures how efficiently a company performs day-to-day business activities such as collection of receivables and management of inventory.

Question 8

What is a “Defensive Interval Ratio”?

Answer 8

A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets.

Calculated as:

(Cash + Securities + Receivables) / (Daily Cash Expenditures)

Question 9

What is “Net Debt”?

Answer 9

An issuer’s total debt less cash and marketable securities.

Question 10

What is the “Debt-to-Assets” ratio?

What is its purpose?

Answer 10

Purpose: Solvency ratio.

Calculation: Total Debt / Total Assets

Question 11

What is the “Debt-to-Capital” ratio?

What is its purpose?

Answer 11

Purpose: Solvency ratio

Calculation:
(Total Debt) / (Total Debt + Total Equity)

Question 12

What is the “Debt-to-Equity” ratio?

What is its purpose?

Answer 12

Purpose: Solvency ratio.

Calculation:
Total Debt / Total Shareholders Equity

Question 13

What is the “Financial Leverage Ratio”?

Answer 13

Average Total Assets /
Average Total Equity

Question 14

What is the “Interest Coverage Ratio”?

Answer 14

A measure of an issuer’s ability to service its debt, typically the ratio of EBIT to Interest Expense.

Question 15

What is “Interest Coverage”?

Answer 15

A solvency ratio calculated as:

EBIT / Interest Payments

Question 16

What is the “Fixed Charge Coverage Ratio”?

Answer 16

A measure of how well a company’s earnings covers its fixed expenses, which may include debt payments, interest expense, and lease costs.

Question 17

How do you calculated the “Fixed-Charge Coverage” ratio?

Answer 17

(EBIT + Lease Payments) / (Interest Payments + Lease Payments)

Question 18

What is “Gross Profit Margin”?

Answer 18

The ratio of gross profit to revenues.

Question 19

What is “Operating Profit Margin”?

Answer 19

EBIT / Revenue

Question 20

What is Pre-Tax Margin?

Answer 20

EBT / Revenue

Question 21

What is Dupont Analysis?

Answer 21

An approach decomposing return on investment (ROI) as the product of other financial ratios.

ROE =
(Net Income Margin)
x (1 / (Asset Turnover))
x (1 / (Equity-to-Capital))

Question 22

What is a “Sensitivity Analysis”?

Answer 22

An analysis that shows the range of possible outcomes as specific assumptions are changed.

Question 23

What is a “Scenario Analysis”?

Answer 23

A technique for exploring the performance and risk of investment strategies in different structural regimes.

Question 24

What is a “simulation”?

Answer 24

A technique of exploring how a target variable (e.g., portfolio returns) would perform in a hypothetical environment specified by the user, rather than a historical setting.