Module 3

Question 1

Profit Margin (PM)

Answer 1

Net Income / Sales (What the company earns on each sales dollar)

Question 2

Asset Turnover (AT)

Answer 2

Sales / Average Total Assets (The higher the ratio, the more efficient the company is at generating revenue from its assets)

Question 3

Financial Leverage (FL)

Answer 3

Average Total Assets / Average Equity

Question 4

ROA

Answer 4

Return on assets (PM x AT)

Question 5

ROE (Basic)

Answer 5

Net Income / Average Equity

Question 6

ROE (Complete)

Answer 6

ROE = PM x AT x FL (Profitability x Productivity x Risk)

Question 7

Cash Conversion Cycle (CCC)

Answer 7

Measures the average time in days it takes to sell inventories, collect the receivables, and pay the payables incurred.

Question 8

CCC Formula

Answer 8

DIO + DSO - DPO

Question 9

DIO

Answer 9

Average Inventory / COGS x 365

Question 10

DSO

Answer 10

Average Accounts receivable / Revenue x 365

Question 11

DPO

Answer 11

Average Accounts Payable / COGS x 365

Question 12

Tax Shield

Answer 12

(FE - FR) x Statutory Tax Rate

Question 13

RNOA

Answer 13

Return on net operating assets (NOPAT / average NOA)

Question 14

NFE

Answer 14

Net Financing Expense (FE - FR - Tax Shield)

Question 15

Nonoperating return formula

Answer 15

FLEV x Spread

Question 16

Spread (formula)

Answer 16

RNOA - NFR

Question 17

FLEV (formula)

Answer 17

Average NFO / Average equity

Question 18

NFR (formula)

Answer 18

NFE / Average NFO

Question 19

NFO

Answer 19

Can be negative or positive (negative - equity finances investments in operating assets, positive - financial obligations finance operational assets

Question 20

EBIT

Answer 20

Earnings before interest and taxes

Question 21

Level 1 Analysis

Answer 21

ROE = RNOA + FLEV x (RNOA - NFR)

Question 22

Level 2 Analysis

Answer 22

RNOA = NOPAT/Sales x Sales/Average NOA

Question 23

NOPM

Answer 23

NOPAT/Sales (operating profitability)

Question 24

NOAT

Answer 24

Sales/Average NOA (operating productivity)

Question 25

Current Ratio

Answer 25

Current Assets/Current Liabilities

Question 26

Quick Ratio

Answer 26

(Cash + Marketable Securities + Accounts Receivable) / Current liabilities (Shows ability to meet current liabilities without liquidating inventories)

Question 27

Liabilities-to-Equity ratio

Answer 27

total liabilities/equity (compares how reliant a firm is on creditor vs equity financing) (A higher indicates less solvency, and more risk)

Question 28

Times Interest Earned Ratio

Answer 28

Earnings before interest and task/interest expense gross (reflects operating income available to pay interest expense) (higher ratio is better so that there is little risk of default). (EBIT = NI + Interest expense, gross + tax expense)

Question 29

Solvency

Answer 29

Ability to meet debt obligations.