POV Module 5

Question 1

Groups of Ratios

Answer 1

Profitability
Liquidity
Financial Efficiency
Debt/Leverage
Market

Question 2

Profitability Ratios

Answer 2

used to assess business’s ability to generate earnings relative to its revenue, operaing costs, BS assets, and equity over time;
Ex: Gross Profit Margin, Operating Profit Margin, Return on Capital Employed

Question 3

Liquidity Ratios

Answer 3

Can business pay its debts?

Ex: Current Asset Ratios, Acid-Test Ratio

Question 4

Financial Efficiency Ratios

Answer 4

Effectiveness of how finances are managed;

Ex: Payables Days, Receivables Days, Inventory Turnover, Gearing

Question 5

Debt/Leverage Ratios

Answer 5

Measure the ability to repay long term debt

Question 6

Market Ratios

Answer 6

Cost of issuing stock and the relationship between return and the value of an investment in company shares

Question 7

earnings management

Answer 7

fraudulent accounting practices that manipulate reporting with intent to influence interpretations of IS

Question 8

metric

Answer 8

deriving a quantitative measurement for otherwise qualitative data

Question 9

benchmarking

Answer 9

comparison across companies in an industry or across different times within a company

Question 10

3 Industry Classifications

Answer 10

primary (extractive)
secondary (manufacturing)
tertiary (services)

Question 11

valuation multiple

Answer 11

expression of market value of an asset relative to a key statistic that is assumed to relate to that value (earnings, cash flow)

Question 12

trend analysis

Answer 12

collecting information and attempting to spot a pattern/trend

Question 13

sentiment

Answer 13

general thought/feeling/sense

Question 14

forecast

Answer 14

estimation of future condition

Question 15

Technical Trend Analysis

Answer 15

using past market data to determine; based on sentiment

Question 16

Fundamental Trend Analysis

Answer 16

uses financial statements

Question 17

Margin Ratios are what class?

Answer 17

Profitability

Question 18

4 Margin Ratios

Answer 18

Gross Margin
Operating Margin
Pre-Tax Margin
Net Profit Margin

Question 19

What does Gross Profit Margin Ratio tell you?

Answer 19

amount of profit earned through sales

Question 20

What does Operating Margin tell you?

Answer 20

percentage of sales left after covering additional operating expenses;
How much money a company is actually making in profit

Question 21

What does Pre-Tax Margin tell you?

Answer 21

profitability after accounting for non-operating expenses

Question 22

What does Net Profit Margin tell you?

Answer 22

ability to generate earnings after taxes

Question 23

2 Return Ratios

Answer 23

Return on Assets

Return on Equity

Question 24

Return ratios are what class?

Answer 24

Profitability

Question 25

What does Return on Assets Ratio tell you?

Answer 25

how effective a company is at deploying assets to generate revenue/profits

Question 26

What does Return on Equity Ratio tell you?

Answer 26

ability to earn a return on equity

Question 27

What does Current Ratio tell you?

Answer 27

measures whether firm has enough to pay debt over 12 months

Question 28

What does Acid Test Ratio tell you?

Answer 28

ability of company to use assets to retire current liabilities immediately

Question 29

2 Liquidity Ratios

Answer 29

Current Ratio

Acid Test Ratio

Question 30

cash equivalent assets

Answer 30

mature within 3 months and have insignificant risk of change in value;
ex: money market, govt bonds, treasury bill, marketable securities

Question 31

3 Debt Management Ratios

Answer 31

Debt Ratio
Times Interest Earned
Cash Coverage Ratio

Question 32

What does Debt Ratio tell you?

Answer 32

firm’s ability to repay long term debt

Question 33

What does Times Interest Earned tell you?

Answer 33

how easily a company can make interest payments

Question 34

EBIT

Answer 34

Earnings Before Interest and Taxes