Financial Statement Analysis

Question 1

Ratios help company to do what?

Answer 1

compare its performance with peers or its own past performance

Question 2

ROE (Return On Equity) =

Answer 2

Net Income/Avg Total Owner’s Equity. shows the return a business earned on the equity invested by owners

Question 3

What is DuPont Framework

Answer 3

Du Pont Framework breaks down ROE into 3 components to figure out where the returns are being generated.Help management determine which areas of the company are weak. Also useful to compare two companies, even if they have the same ROE

Question 4

What are the components of Dupont Framework?

Answer 4

1)Profitability 2)Operating Efficiency 3)Financial Leverage

Question 5

ROE =

Answer 5

Profit Margin * Asset Turnover * Leverage

Question 6

What is Efficiency?

Answer 6

How well its company uses assets to generate revenue

Question 7

What is Financial Leverage?

Answer 7

How a company uses Debt to finance its assets

Question 8

ROE = Net Income/Avg. Owner’s Equity=

Answer 8

Net Income/Sales * Sales / Avg Total Assets * Avg Total Assets/Avg Equity

Question 9

Profit Margin =

Answer 9

Net Income/Total Sales (How much a company keeps in earnings for every dollar of sales after all expenses have been subtracted)

Question 10

What does Profit Margin help understand?

Answer 10

Which company is best at controlling its costs and earning profits

Question 11

Gross Profit Margin =

Answer 11

Gross Profit (Sales - COGS)/ Sales.

Captures percentage of revenue available to pay for a company’s expenses after cost of goods sold is subtracted.

Question 12

What is EBIAT?

Answer 12

earnings Before Interest After taxes. Good measure of company’s operating performance. Shows company’s earnings without affects of company’s capital structure or amount of debt to equity.

Question 13

EBIAT Or NOPAT (Net Operating Profit After Taxes)=

Answer 13

EBIT (Income before taxes + Interest Expense) * (1-corporate tax rate)

Question 14

Corporate Tax Rate =

Answer 14

Tax Expense / Income Before Taxes

Question 15

What is Asset Turnover?

Answer 15

How well company uses assets to generate revenues. Using Fewer assets to generate higher revenue operates better from efficiency perspective.

Question 16

Asset Turnover =

Answer 16

Revenues (From Income Statement) / Avg Total Assets (This is got from Balance Sheet)

Question 17

What is Inventory Turnover?

Answer 17

Shows how fast a company is selling its inventory. No of times a company sells its inventory and replaces it. More inventory for given sales reduces eficiency because extra inventory uses resources

Question 18

Inventory Turnover =

Answer 18

COGS/Avg. Inventory. No of times a company sells inventory per year. Higher value => More efficient Inventory Management

Question 19

What is Days Inventory

Answer 19

Avg no of days item sits in inventory before being sold

Question 20

Days Inventory =

Answer 20

Average Inventory/(COGS/365), 365/Inventory Turnover

Question 21

What is Accounts Receivable Turnover

Answer 21

Show how quickly a company collects payments from its customers. Operating efficiency. No of times a year outstanding avg receivable balance is fully collected

Question 22

Accounts Receivables TurnOver =

Answer 22

Net Credit Sales / Avg Accounts Receivable Balance

Question 23

What is Average Collection Period/Days Sales outstanding

Answer 23

365/Accounts Receivable Turnover. Avg Number of days it took to collect cash from customer.