Financial Analysis and Performance Evaluation
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Questions and Answers

What equation represents the relationship between assets, liabilities, and equity?

  • Assets + Liabilities = Equity
  • Assets = Liabilities + Equity (correct)
  • Assets - Liabilities = Equity
  • Assets = Liabilities - Equity
  • Which financial statement tracks sales, expenses, and profits during a specific period?

  • Income Statement (correct)
  • Equity Statement
  • Cash Flow Statement
  • Balance Sheet
  • What does EBITDA stand for?

  • Earnings Before Investments, Taxes, Dividends, and Audits
  • Earnings Breakdown Including Taxes, Deductions, and Assets
  • Earnings Based on Interest, Taxes, Deductions, and Accounting
  • Earnings Before Interest, Taxes, Depreciation, and Amortization (correct)
  • Which of the following indicates significant financial risk when evaluating a balance sheet?

    <p>High levels of debt relative to equity</p> Signup and view all the answers

    When interpreting revenue data, which aspect is critical to assess?

    <p>The speed of sales growth</p> Signup and view all the answers

    What does gross margin represent in financial terms?

    <p>Revenue minus Cost of Goods Sold</p> Signup and view all the answers

    Which of the following describes 'Net Sales'?

    <p>Sales after discounts and allowances</p> Signup and view all the answers

    What key aspect should be analyzed when evaluating the changes in a balance sheet?

    <p>Significant increases or decreases in specific items</p> Signup and view all the answers

    What is the primary benefit of using value-chain analysis within a firm?

    <p>To explore relations among activities and stakeholders.</p> Signup and view all the answers

    Which of the following does NOT represent a primary activity in a firm's value chain?

    <p>Finance Management</p> Signup and view all the answers

    What are the key attributes that a firm's resources must possess to maintain a sustainable competitive advantage?

    <p>Valuable, rare, inimitable, and non-substitutable.</p> Signup and view all the answers

    Which of the following is a limitation of financial ratio analysis?

    <p>It may not consider qualitative factors affecting performance.</p> Signup and view all the answers

    What perspective does the balanced scorecard NOT typically emphasize?

    <p>Employee satisfaction</p> Signup and view all the answers

    Which of the following actions is part of the strategic management process?

    <p>Comparing the desired performance with actual performance.</p> Signup and view all the answers

    How does financial analysis aid in assessing firm performance?

    <p>By comparing with competitor performance and industry trends.</p> Signup and view all the answers

    What role does cash flow statement play in financial analysis?

    <p>It provides insights into a firm's liquidity.</p> Signup and view all the answers

    What is important to consider when analyzing net income and its relationship to net revenues?

    <p>The company's historical growth</p> Signup and view all the answers

    What could cause profits to lag even if revenues are increasing?

    <p>A rise in the cost of sales</p> Signup and view all the answers

    Which factor is NOT typically analyzed when assessing the intensity of competition in an industry?

    <p>The average salary of employees in the industry</p> Signup and view all the answers

    To whom should a company compare its net income growth for a robust analysis?

    <p>To its strategic group competitors</p> Signup and view all the answers

    In the income statement of Home Depot, which component had the highest percentage change in 2006?

    <p>Depreciation and amortization</p> Signup and view all the answers

    What implication does a net income increase with a revenue increase usually have?

    <p>Profit margins are improving</p> Signup and view all the answers

    If a company experiences a large write-off, what is a potential effect on its financial statements?

    <p>Decrease in overall net income</p> Signup and view all the answers

    What factor contributed to Dell's revenue growth in enterprise systems according to the data?

    <p>Focus on enterprise systems services</p> Signup and view all the answers

    What should a company do if it recognizes a cash flow problem?

    <p>Evaluate cash management strategies</p> Signup and view all the answers

    What does a negative percentage change in net income suggest about a company’s performance?

    <p>The company is struggling with profitability</p> Signup and view all the answers

    Which perspective focuses on customer satisfaction and critical internal operations?

    <p>Internal business perspective</p> Signup and view all the answers

    What is a key requirement for introducing new products with extended capabilities?

    <p>Human capital</p> Signup and view all the answers

    What does the financial perspective primarily measure?

    <p>Profitability and growth</p> Signup and view all the answers

    Which limitation of the balanced scorecard emphasizes the need for a cultural change?

    <p>Needs a focus on nonfinancial measures</p> Signup and view all the answers

    Which of the following is NOT a goal associated with the financial perspective?

    <p>Reduced cycle time</p> Signup and view all the answers

    Why is too much cash considered detrimental for a business?

    <p>It represents lost investment opportunities.</p> Signup and view all the answers

    What is the current ratio formula?

    <p>Current Assets / Current Liabilities</p> Signup and view all the answers

    Which liquidity ratio is considered an 'acid test'?

    <p>Quick Ratio</p> Signup and view all the answers

    Which of the following ratios helps understand a company's efficiency in using its assets?

    <p>Return on Assets (ROA)</p> Signup and view all the answers

    What does a Debt to Equity Ratio greater than 2 signify?

    <p>Significant reliance on debt financing.</p> Signup and view all the answers

    Which financial ratio is used to measure shareholder profitability?

    <p>Earnings per Share (EPS)</p> Signup and view all the answers

    What is the significance of the Cash Ratio?

    <p>It assesses the ability to meet short-term obligations using only cash.</p> Signup and view all the answers

    What does the Debt to Asset Ratio indicate?

    <p>The extent to which borrowed funds are used to purchase assets.</p> Signup and view all the answers

    Which ratio provides insight into a company's capital efficiency?

    <p>Return on Invested Capital (ROIC)</p> Signup and view all the answers

    What is a crucial aspect of meaningful ratio analysis?

    <p>Analysis of time-changes in ratios.</p> Signup and view all the answers

    Total Shareholder Return (TSR) accounts for which of the following?

    <p>Dividends plus change in stock price over a period.</p> Signup and view all the answers

    Which of the following is NOT a type of financial ratio?

    <p>Time Ratio</p> Signup and view all the answers

    Where can you find financial information for analysis?

    <p>Investor information on company websites and financial news outlets.</p> Signup and view all the answers

    Study Notes

    Evaluating Firm Performance

    • Financial Analysis is used in the strategic management process to compare desired and actual performance
    • Financial analysis can help assess firm performance, compare performance over time, with industry norms, and with competitors
    • It can also determine if a firm's strategy is working and identify problems

    Financial Ratio Analysis

    • Financial analysis helps you understand what to look for in financial statements, how to perform basic ratio analysis, how to interpret financial statements data strategically, and what financial forecasting entails

    Assessing the Balance Sheet

    • The basic accounting equation states: Assets = Liabilities + Equity
    • Any increase in assets must be associated with an equal increase in liabilities or equity
    • When reviewing a balance sheet, you can determine if the firm is large or small by examining the Total Assets
    • Look at the biggest items on the balance sheet and identify any significant changes (increases/decreases)
    • A significant amount of debt relative to equity may indicate financial risk

    Interpreting the Income Statement

    • The income statement, also known as the "Profit and Loss Statement", tracks sales, expenses, and profit/loss of a business during a given period.
    • Net Sales - The total sales made after taking into account discounts and allowances.
    • Gross Margin - Sales revenue minus the cost of goods sold.
    • EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization

    Interpreting Income Statements Strategically

    • Examine sales growth to see if it is slow or fast by comparing it to previous growth, industry average, and main competitors
    • Analyze Net Income/Loss to identify if sales and profits are changing at the same rate and identify the potential reasons for discrepancies

    Cash Flow Statement

    • A company with too little cash cannot pay employees, debts, or suppliers.
    • Too much cash signifies lost investment opportunities.
    • Cash is particularly important in countries with poor access to credit.

    Financial Ratio Analysis

    • Five types of financial ratios:
      • Short-term solvency or liquidity
      • Long-term solvency measures
      • Asset management or turnover
      • Profitability
      • Market value
    • Meaningful ratio analysis involves analysis of how ratios change over time, comparison with industry norms, and comparison with key competitors

    Liquidity Ratios

    • Measure the ability to pay short-term obligations
    • Current Ratio (CR) - Current Assets / Current Liabilities. A ratio of 1-2 is considered safe (rule of thumb).
    • Quick Ratio (QR) - (Current Assets - Inventory) / Current Liabilities, A ratio above 1 is considered safe (rule of thumb).
    • Cash Ratio - Cash / Current Liabilities

    Leverage/Solvency Ratios

    • Measure ability to meet long-term obligations
    • Debt to Asset Ratio - Total Debt / Total Assets. A ratio of .5 or less is considered safe (rule of thumb).
    • Debt to Equity Ratio - Total Debt / Shareholders' Equity. Evaluates whether a lot of debt is being used to finance growth.
    • Return on Assets (ROA) - Net Profit / Total Assets. A measure of management efficiency.
    • Return on Invested Capital (ROIC) - Net Operating Profit after Taxes / Invested Capital. A measure of the efficiency of using capital.
    • Return on Equity (ROE) - Net Profit/ Stockholders' Equity. Rate of return on shareholders' investment.
    • Gross Margin Gross Profit / Net Sales

    Shareholder Ratios

    • Earnings per share (EPS) - (Net Profit - Preferred Stock Dividend) / Common Shares Outstanding.
    • Price to Earnings (PE) Ratio - Share Price / Earnings per Share.
    • Total Shareholder Return (TSR) - (Dividends + Share Price at the end of the period (adjusted for splits)) / Share Price at the beginning of the period

    Sources of Financial Information

    • Company websites (Investor Information, Corporate Sections, Earnings reports, Annual reports)
    • Financial Websites (Yahoo Finance, The Wall Street Journal, Fortune.com, SEC)
    • Databases (Compustat)

    The Balanced Scorecard

    • An integration of many issues that come into evaluating performance
    • Four Key Perspectives:
      • Customer Perspective
      • Internal Perspective
      • Innovation & Learning Perspective
      • Financial Perspective

    Internal Business Perspective

    • Managers should focus on critical internal operations that enable the firm to satisfy customer needs.
    • Business processes - Cycle time, quality, employee skills, productivity.
    • Decisions, coordinated actions, and key resources and capabilities

    Innovation and Learning Perspective

    • Managers must frequently introduce new products as well as adapt existing products and services
    • This requires human capital (skills, talent, knowledge), information capital (information systems, networks), and organizational capital (culture, leadership).

    Financial Perspective

    • Managers measure how the firm’s strategy, implementation, and execution are contributing to bottom line improvement
      • Financial Goals: Profitability, growth, shareholder value
      • Desired Outcomes: Improved Sales, Increased Market Share, reduced operating expenses, higher asset turnover

    Limitations of the Balanced Scorecard

    • Not a "quick fix" - needs proper execution
    • Requires a commitment to learning
    • Needs employee involvement
    • Needs cultural change
    • Needs a focus on nonfinancial measures
    • Requires data on actual performance

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    Description

    This quiz focuses on evaluating firm performance through financial analysis, including ratio analysis and balance sheet assessment. Understand how to interpret financial statements and what factors can indicate a firm's strategic effectiveness. Test your knowledge on key financial concepts and principles.

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