Firm performance

Question 1

Why is performance measuring important?

Answer 1

In order to deliver positive results, managers need to be able to measure past performance and predict future performance.

Financial statements can provide usefull information in determining a company’s performance

Question 2

What is ratio analysis?

Answer 2

Ratio analysis refers to a series of financial measurements, that help build a story behind the numbers and allow managers to discover more information about specific areas of a company’s performance.

Question 3

What are the desired results of ratio analysis?

Answer 3

Either:

• To find some warning flags
• To uncover some gold nuggets, metaphorically speaking

Question 4

What are the fiancial statements used for ratio analysis?

Answer 4

• The balance sheet
• Income statement (a record of the business activities over the past fiscal year)

Question 5

What is benchmarking?

Answer 5

Through the use of benchmarking, we compare a company’s current performance against its own previous performance, or its competitors.

Question 6

What are common-size financial statements used for?

Answer 6

Common-size financial statements are used when comparing companies with different sizes.

In this staement, each line is expressed as percentages of a common base figure (for income statements it is usually sales/revenue)

Question 7

What are financial ratios?

Answer 7

They are relationships between different accounts from financial statements

Question 8

Enumerate the financial ratios:

Answer 8

1. Liquidity ratio: meet obligations over short-term
2. Solvency ratios: meet obligations over long-term
3. Asset management ratios: managing of assets for profit
4. Profitability ratios: overall performance of the company
5. Market value ratios: how does the market view the company?

Question 9

What are the short-term solvency ratios?

Answer 9

1. Current ratio
2. Quick/Acid ratio
3. Cash ratio

Question 10

What are the long-term solvency ratios?

Answer 10

• Debt ratio: amount of debt for every dollar of assets
• Time interest earned: the number of times over a company has its interest obligation cvoered by its EBIT
• Cash coverage ratio: indicates a company’s ability to generate cash from operaitions to meet its financial obligations

Question 11

What are the asset management ratios?

Answer 11

1. Inventory turnover
2. Days sales in inventory
3. Days sales in receivables
4. Receivables turnover
5. Total asset turnover

Question 12

What are the profitability ratios?

Answer 12

1. Profit margin: % of sales generated as profit
2. Return on assets: measures how well the assets are generating income
3. Return on equity: shows how much profit is being generated for the owners

Question 13

What are market value ratios?

Answer 13

Market value ratios measure the performance of the firm against the percieved value of the firm from the trading value of the shares or number of shares.

Question 14

What are the components of ROE according to the DuPont Analysis?

ROE = Return on equity

Answer 14

1. Operating efficiency
2. Asset management efficiency
3. Financial leverage

Question 15

What is inventory turnover?

Answer 15

Inventory turnover shows the number of times inventory is sold/restocked

Question 16

What is days sales in inventory?

Answer 16

Days sales in inventory shows the number of days in which inventory is on the shelf before is sold

Question 17

What is receivables turnover?

Answer 17

Receivables turnover shows the number of times payment is collected

Question 18

What is days sales in receivables?

Answer 18

It shows the number of days in which receivables are collected

Question 19

What is total asset turnover?

Answer 19

Total asset turnover shows the efficiency ratio of management