Profitability analysis Flashcards
What does the ROIC express?
a) Abnormal profits
b) Return on invested capital
c) Return on equity
d) The return on capital invested in a firm’s net operating assets as a percentage
e) a + b
f) b + d
g) d + a
f)
How do you calcualte ROIC - both before and after tax?
After tax:
ROIC=(Net operating profit after tax (NOPAT))/(Invested capital)*100
Before tax:
ROIC=EBIT/(Invested capital)*100
A higher ROIC will, ceteris paribus, lead to a ________ estimated value and make a company more ___________ to provide loans from a bank’s perspective
a) Lower, attractive
b) Higher, uncertain
c) Higher, attractive
d) lower, uncertain
c) Higher, attractive
How is WACC calculated?
WACC=D/(D+E)r_d(1-τ)+E/(D+E)*r_e
(Market values for debt and equity)
How is EVA calculated?
EVA=(ROIC-WACC)*Invested capital_t-1
When does a company create excess return (value for shareholders)?
a) ROIC=WACC
b) ROIC>WACC
c) ROIC<WACC
d) ROIC is not compared to WACC when looking at EVA
b)
How is ROIC calculated based on Equity?
ROIC=((MV_Equity-BV_Equity )*(WACC-g))/(Invested capital)
Which of the following effect ROIC?
a) Differences in accounting policies
b) Inflation
c) Average age of assets
d) Differences in operating risks
e) Product lifecycle
f) All of the above
a, c, d + e)
What is true about the IRR?
a) IRR is not related to accounting
b) ROIC is the accounting equivalent to IRR
c) It is used as a financial ratio for measuring ROIC
d) It shows what investor can expect to earn on average each year during the lifetime of a project
e) IRR and ROIC is always equal
b, c + d)
e) is not true as it depends on the depreciation scheme –> depreciation must increase over time for the two to be equal
IRR = ROIC is typical for:
a) Start ups
b) Stabil businesses
c) Firms under liquidation
d) All of the above
a+c)
Assuming no financial leverage, the expected return is estimated by:
E[r_i ]=r_f+β_a [r_m-r_f ]=r_f+β_a*risk premium
When the expected return increases, what happens to the beta unlevered?
a) Decreases
b) Increases
c) Increases exponentially
d) Is not affected
b)
The following statement characterises which stage of the product lifecycle?
“Investments in R&D, marketing, building sales organisation etc.”
Introduction
The following statement characterises which stage of the product lifecycle?
“Organisation is geared to handle the growth (capital intensive)”
Growth
The following statement characterises which stage of the product lifecycle?
“Moderate growth pace as the product has been accepted in the market. Companies are reaping the gains of the previous phases of investments. Increases competition”
Maturity
The following statement characterises which stage of the product lifecycle?
“As the technological development makes products obsolete in the mature stage, the demand decreases and the products will be phased out gradually as they become unprofitable”
Decline
How is the ROIC calculated (first step decomposition)?
ROIC=Profit margin*Turnover rate of invested capital
How is the profit margin calculated (before and after tax)?
Profit margin (operating profit margin) after tax
Profit margin=NOPAT/(Net revenue)*100
Profit margin (operating profit margin) before tax
Profit margin=EBIT/(Net revenue)*100
How is the turnover rate of invested capital calculated?
Turonver rate of invested capital=(Net revenue)/(Invested capital)*100
What does a turnover rate on invested capital of “2” indicate?
a) That is will take the company 2x its NOPAT to repay its investments
b) A firm has tied up invested capital in 180 days ((360 days)/2)
c) For each unit of valuta that the firm has invested in operation, a sale of 2 units of valuta is generated
d) For every 2 units of valuta that the firms has invested in operation, a sale of 1 unit is generated
b+c)
What characterises service industries?
a) Heavily investing and a high turnover rate
b) Few investments and a high turnover rate
c) Few investments and a low turnover rate
d) Heavily investing and a low turnover rate
b)
Difficult to maintain a high profit margin because the price is often a major competitive parameter. The high turnover rate is achieved by tight cost control throughout the value chain, while invested capital held at a minimum
What characterises pharmaceutical companies?
a) Heavily investing and a high turnover rate
b) Few investments and a high turnover rate
c) Few investments and a low turnover rate
d) Heavily investing and a low turnover rate
d)
The price is not in the same way an important competitive parameter possible to maintain a high profit margin. The higher profit margins are compensating for the low turnover rates, to attract capital to the industry
Which relationship is true?
a) Turnover rate on invested capital>1⇒EVA<0
b) Turnover rate on invested capital=1⇒EVA=0
c) Turnover rate on invested capital>1⇒EVA>0
d) Turnover rate on invested capital<1⇒EVA<0
e) Turnover rate on invested capital=1⇒EVA is increasing
b, c +d)
What are appropriate methods of identifying trends and how ratios have detoriated over time?
a) Peer analysis
b) Indexing
c) Analytical income statement
d) Common-size analysis
b+c)
TRUE or FALSE?
Days on hand (current assets)<0⇒ number of days of credit the company offers its customers ⇒ increases working capital and invested capital
FALSE
The statement is true if
Days on hand (current assets)>0
TRUE or FALSE?
Days on hand (current liabilities)<0⇒ number of days of credit the company gets from its suppliers ⇒ reduces the need for invested capital
TRUE
How is ROE calculated (simple form)?
ROE=(Net earnings after tax)/(Book value of equity)*100
Which of the following directly affect the level and trend in ROE?
a) Investing activity
b) Operating profitability
c) Tax rate
d) Net borrowing interest rate after tax
e) Financial leverage
f) All of the above
b, d + e)
Show the relationship of ROE with decomposition
ROE=ROIC+(ROIC-Net Borrowing Cost)*NIBD/(BV_E )
What is true about the relationship between ROIC and Net Borrowing Cost?
a) ROIC<NBC ⇒ increase in financial leverage will improve ROE
b) ROIC>NBC ⇒ increase in financial leverage will improve ROE
c) ROIC<NBC ⇒ increase in financial leverage will worsen ROE
c) ROIC<NBC ⇒ decrease in financial leverage will worsen ROE
b+c)
