RECITATION 3 (L10)

Question 1

What is ROFL (Return on Financial Leverage)?

Answer 1

Financial leverage is the use of debt to increase the return on equity.

Question 2

ROA (Return on Assets) can be disaggregated into two components, to determine which factor drives ROA.

• two components
• Intepretation

Answer 2

ROA = PM × AT

• PM (Profit Margin Formular)
• AT (Asset Turnover Formular)

Indicates whicht factor drives the ability to generate profit of overall performance:
sales compared to using assets

Question 3

How do these turnover measures compare?

• PPET
  (Property, Plant Turnover)
• ART
  (Accounts Receivable Turnover)
• INVT
  (Inventory Turnover)

Answer 3

PPET
(Property, Plant, and Equipment Turnover)

• Measures how efficiently a company uses fixed assets to generate revenue.
• Relevant for capital-intensive industries (e.g., manufacturing).

ART
(Accounts Receivable Turnover)

• Evaluates the efficiency of credit sales collection and cash flow management.
• Higher turnover indicates customers are paying promptly.

INVT
(Inventory Turnover)

• Assesses how effectively inventory is managed and converted into sales.
• High turnover reflects strong sales or efficient inventory control.

Question 4

• Current ratio
• Quick ratio

What is it used for? (3)

Answer 4

• The current ratio and quick ratio are Liquidity Ratios
• Measure ability to meet its short-term obligations.
  Use figures from the balance sheet.
• Quick Ratio is a more stringent measure of a company’s liquidity. It excludes inventory from current assets since inventory may take time to convert to cash.

Question 5

What relate to Return on Investment Metrix? (2)

Answer 5

Return on Financial Leverage (ROFL), measures use of debt / Leverage of ROE
(Return on Equity)

DuPont Analysis of ROA
(Return on Assets)

• Profit Margin, proftability
• Asset Turnover, effiziency

Question 6

Give relevant Ratios / Metrics
and categorize them
by the main focus areas (5)

💦⏱️📈

Answer 6

LIQUIDITY RATIO

1. INVT (Inventory Turnover)

EFFICIENCY RATIO

2. ETS (Expense to Sales Revenue)
3. ART (Accounts Receivable Turnover)
4. PPET (PP&E Turnover)

MARKET RATIO

5. GPM (Gross Profit Margin / Profitmarge)

Question 7

Liquidity and Solvency Ratios (4)

Answer 7

Question 8

How to calculate Net Income from revenues? (4)

Answer 8

Question 9

Give a definition for “Earnings Without Interest Expense” (EWI)

• Formular
• Explaination (alternativ name)

Answer 9

EWI = Net Income + Interest × (1−Tax Rate)

EWI or NOPAT, typically referred to as: “Net Operating Profit After Tax” (NOPAT). Company with no debt.

Question 10

Return on Investment Metrics are Ratios that, divide .. (2)

Answer 10

• some measure of performance
  (income statement)
• by the average amount of
  investment (balance sheet)

Question 11

What is ROE (Return on Equity)?

Answer 11

ROE is the primary summary measure
of company performance

Question 12

Components of ROA (Dupont Analysis)?

Answer 12

• Disaggregated into profit margin (PM) and asset turnover (AT)
• Captures both profitability and efficiency.

Question 13

Main Stepts for Financial Statement Analysis (4)

Answer 13

1. Measure Profitability
   ROE, ROA, ROFL
2. Compare Profit to Assets
   AT, PM
3. Compare Expenxes
   GPM, ETS
4. Check for Efficiency
   ART, INVET, PPET