Trend Analysis

Question 1

What are the growth ratios an analyst should be looking at?

Answer 1

Asset growth, Revenue growth, and profitability growth

Question 2

Assets are growing faster than revenues or profitability. What does this indicate?

Answer 2

Asset utilization or ability to generate revenues is declining.

Question 3

Revenue growth is greater than profitability growth. What does this indicate?

Answer 3

There may be a problem with management of expenses.

Question 4

Asset growth leads to greater revenue growth, which leads to even higher profitability growth. What does this indicate?

Answer 4

Ideal scenario indicating good financial management.

Question 5

What is Degree of Total Leverage Equal to?

Answer 5

Degree of operating leverage X Degree of Financial Leverage

Question 6

Operating Leverage

Answer 6

%Change in EBIT/% Change in Revenue - Shows fixed costs vs. variable costs.

Question 7

Financial leverage

Answer 7

%Change in net income/%Change in Ebit - Shows how much debt financing is being utilized.

Question 8

Total Leverage

Answer 8

%Change in Net Income/%Change in Revenue

Question 9

What is true if all costs are variable?

Answer 9

Then operating profit can only grow at the rate of revenue growth. If we turn variable costs into fixed costs we introduce operating leverage.