Module 20 Flashcards
For financial ratio analysis, it has limited use as an analytical tool for?
comparing companies that use different accounting methods
The lack of consistency across companies makes comparability/interpretation difficult to analyze and limits the usefulness of ratio analysis.
Interpreting ratios, for comparing to a benchmark (industry, comparable), we use:
cross sectional (comparing two company’s number at the same point in time)
When interpreting ratios, for comparing to historical performance, we use
time-series (comparing one company’s numbers over a period of time)
Which type of ratio bests measures operating performance?
activity ratios
How efficiently is the company using it’s assets?
activity ratios
An increase in number of days of payable, will have what effect on the cash conversion cycle?
shorten, improving liquidity
In order to assess a company’s ability to fulfill its long-term obligations
solvency
Increasing debt to equity will tell us what about a company’s solvency?
solvency is decreasing- the company is taking on more debt, therefore having more debt to pay off in the long term
Decline in a company’s equity could indicate that the company is:
incurring losses
paying dividends greater than income
repurchasing shares
Is the book value of a company’s equity impacted by the changes in MV of it’s common stock?
No
* Beginning equity + New shares issuance – Shares repurchased + Comprehensive income – Dividends = Ending equity
Creditworthiness is not evaluated based on how much a company has ______ but rather on its willingness and ability to pay its obligations
increased its debt
Current ratio shows a company’s ____?
liquidity; ability to make its short term obligations
Dupont analysis=?
ROA * leverage
net profit margin * asset turnover * leverage ratio
5 point dupont analysis=?
= tax burden * interest burden * EBIT margin* asset turnover (efficiency) * leverage
Common size income statement divides all accounts by?
Total sales
Common size balance sheet divides all account by?
Total assets
If a current asset and current liability decrease by the same amount and the current ratio is greater than 1, then the numerator ______ less in percentage terms than the denominator, and the current ratio ______.
decreases
increases
When inventory is purchased, what happens to the quick ratio?
Inventory is not included in the quick ratio as an asset, but the cash used to fund the purchase would decrease, thus decreasing the numerator & decreasing the quick ratio
If Current Ratio is > 1, and if CA and CL both fall, the overall ratio will _____.
increase; the numerator decreases by less percentages than the denominator
The PE ratio divides _____ by ____?
current market price of a share of stock / EPS
Diluted EPS is calculated to be the ______ EPS that could have been reported if all dilutive securities were converted.
Lowest possible EPS
Per share valuation ratio?
Earnings per share (EPS)
Per share measures are not comparable amongst firms because why?
the number of shares outstanding (the denominator) differ amongst firms
Dividends are declared on a _____ basis
per common share basis
RE is the earning that are used _____, rather than ______
grow the firm, rather than be distributed to equity shareholders
The proportion of earnings reinvested
retention rate
Measures how fast a company can grow without additional external equity issues, while holding leverage constant
Sustainable growth rate
Growth in shareholders’ equity, in isolation, will indicate what about profitability?
Nothing; does not provide enough information to assess profitability
Measures the “multiple” that the stock market places on a company’s EPS
P/E ratio
A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments’ _____, _____, _____.
revenue, assets, or operating profit/loss
Forecasts should involve _______. The results of financial analysis are integral to this process, along with ______
a range of possibilities
judgment of the analysts
Shows the range of possible outcomes as specific assumptions are changed
Sensitivity analysis; “what if” analysis
Shows changes in key financial quantities that result from given economic events
Scenario analysis
Computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes
Simulation
Profitability ratios include:
dividing by revenue
return on ratios
Accounting standards require segment for a distinguishable part of a firm that compromises at least:
10%
