SU 3: Profitability Analysis & Analytical Issues

Question 1

EBITDA

Answer 1

Earnings before interest, taxes, depreciation and amortization. This approximates accrual-basis profits for ongoing operations

Question 2

EBITDA Margin Percentage

Answer 2

EBITDA/Net Sales

Question 3

Return on Assets (ROA)

Answer 3

Net Income/Average total assets

Question 4

DuPont Model for Return on Assets

Answer 4

Net Income/Average Total Assets=Net profit margin [Net Income/Sales] x Total asset turnover [Sales/Average Total Assets]

Question 5

DuPont Model for Return on Equity

Answer 5

Net profit margin x Assets turnover x Equity multiplier

Question 6

DuPont Model for Return on Common Equity

Answer 6

Net profit margin x Total asset turnover x Common equity multiplier

Question 7

Equity Mutliplier

Answer 7

Average total assets/Average total equity

Question 8

Net Profit Margin

Answer 8

Net Income/Net Sales

Question 9

Return on Common Equity (ROCE)

Answer 9

Net income - Preferred dividends/Average common equity

Question 10

Common Equity Multiplier

Answer 10

Average total assets/Average common equity

Question 11

Book Value per Share

Answer 11

Total equity - Liquidation value of preferred equity/Common shares outstanding

Question 12

Market/Book Ratio

Answer 12

Market price per share/Book value per share

Question 13

Price/Earnings Ratio

Answer 13

Market price per share/Diluted earnings per share

Question 14

Price/EBITDA Ratio

Answer 14

Market price per share/EBITDA

Question 15

Return on Equity (ROE)

Answer 15

Net Income/Average total equity

Question 16

Basic Earnings per Share (BEPS)

Answer 16

Income available to common shareholders (IACS)/Weighted-average number of common shares outstanding

Question 17

Earnings Yield

Answer 17

Earnings per share/Market price per share

Question 18

Dividend Payout Ratio

Answer 18

Dividend to common shareholders/IACS or EPS

Question 19

Dividend Yield

Answer 19

Dividend per share/Market price per share

Question 20

Reporting Currency

Answer 20

The currency in which an entity prepares it’s financial statements

Question 21

Functional currency

Answer 21

The currency of the primary economic environment in which the entity operates

Question 22

Foreign currency transactions

Answer 22

Fixed in a currency other than the functional currency (i.e. Buying or selling on credit)

Question 23

Foreign currency translation

Answer 23

Amounts that are 1) denominated in a different currency or 2) are measured in a different currency (i.e. a liability denominated in a foreign currency)

Question 24

Impairment Loss (GAAP)

Answer 24

1) Compare the carrying amount to the undiscounted cash flows, if the carrying amount is greater then 2) the impairment is booked for the difference between the carrying amount and the fair value

Question 25

Impairment Loss (IFRS)

Answer 25

Equals the excess of the carrying amount over its recoverable amount. Which is the greater of the fair value minus costs to sell or value in use