Financial Analysis Introduction Quiz
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Questions and Answers

What does 'paid up capital' refer to in the context of shareholders' equity?

  • Total net income retained by the company
  • The market value of shares issued by a company
  • The amount paid to shareholders in the form of dividends
  • The par value of the stock shares that have been issued (correct)

Which of the following is an example of current liabilities?

  • Accounts Payable (correct)
  • Investment securities
  • Long-term debt
  • Bonds payable

What components make up the formula for calculating 'working capital requirement' (BFR)?

  • Current assets - Current liabilities
  • Total assets - Current liabilities
  • Inventory + Cash - Short-term debt
  • Inventory + Accounts Receivable - Accounts Payable (correct)

What is included in 'other equity accounts'?

<p>Preferred stock and treasury stock (A)</p> Signup and view all the answers

How is 'capital employed' in a company defined?

<p>Non-current assets plus working capital requirement plus cash (D)</p> Signup and view all the answers

What comprises invested capital?

<p>Equity and financial debt (C)</p> Signup and view all the answers

What is the working capital requirement (WRC) calculated as?

<p>Inventory plus accounts receivable minus accounts payable (A)</p> Signup and view all the answers

Under what condition is a subsidiary fully consolidated?

<p>When the parent holds over 50% of the voting rights (D)</p> Signup and view all the answers

What is true about revenue recognition?

<p>Revenue is recognized when the effort to generate the sale is substantially complete with a reasonable expectation of payment (A)</p> Signup and view all the answers

What does the income statement present?

<p>The revenues and expenses, detailing the profit or loss for the accounting period (D)</p> Signup and view all the answers

What does the net profit margin measure?

<p>The profit after tax relative to sales (D)</p> Signup and view all the answers

Which formula correctly represents Return on Assets (ROA)?

<p>ROA = $ rac{ ext{Net profit after tax}}{ ext{Total assets}}$ (C)</p> Signup and view all the answers

What is a major limitation of the Return on Equity (ROE)?

<p>ROE can misrepresent risk since it uses book value not market value (D)</p> Signup and view all the answers

How is EBITDA margin calculated?

<p>EBITDA margin = $ rac{ ext{EBITDA}}{ ext{sales}}$ (D)</p> Signup and view all the answers

What does Gross margin represent?

<p>The profit after deducting only cost of goods sold from sales (D)</p> Signup and view all the answers

What characterizes operating cash flows in a cash flow statement?

<p>They should be positive, indicating self-funding business cash flows. (D)</p> Signup and view all the answers

Which of the following is typically considered an investing cash flow?

<p>Payments for purchase of PPE (C)</p> Signup and view all the answers

How should financing cash flows generally be characterized?

<p>They should be positive, indicating an increase in borrowed funds or capital contributions. (D)</p> Signup and view all the answers

What is the main purpose of common-size financial statements?

<p>To facilitate inter-firm financial comparisons despite size differences. (A)</p> Signup and view all the answers

Which of the following activities does not fall within financing activities?

<p>Sale of physical assets (C)</p> Signup and view all the answers

What do profitability ratios generally measure?

<p>The overall performance as a return on sales or investment. (C)</p> Signup and view all the answers

Which factor indicates a negative investing cash flow?

<p>Acquired more assets than disposed, indicating business expansion. (A)</p> Signup and view all the answers

Which of the following is a primary reason for lenders to engage in financial analysis?

<p>To ensure timely reimbursement (C)</p> Signup and view all the answers

What is the formula to calculate net increase or decrease in cash?

<p>Cash at the end of the period minus cash at the beginning of the period. (A)</p> Signup and view all the answers

What does the cash flows statement primarily indicate?

<p>The cash movements over a specific period (C)</p> Signup and view all the answers

Which of the following is NOT a component of the balance sheet?

<p>Revenue (A)</p> Signup and view all the answers

What is the formula to calculate the net book value of Property, Plant, and Equipment (PP&E)?

<p>Original cost - accumulated depreciation (A)</p> Signup and view all the answers

Which type of assets are expected to be converted into cash within one year?

<p>Current assets (A)</p> Signup and view all the answers

Which of the following is considered an example of intangible assets?

<p>Goodwill (A)</p> Signup and view all the answers

Which aspect of financial performance focuses on how effectively the company generates profit from its resources?

<p>Profitability (C)</p> Signup and view all the answers

What type of inventories do retail companies typically hold?

<p>Finished goods (A)</p> Signup and view all the answers

What does the Earnings per Share (EPS) metric primarily provide to share investors?

<p>A common denominator to gauge investment returns (B)</p> Signup and view all the answers

What relationship does the Dividend Payout Ratio express?

<p>Dividend per share to earnings per share (B)</p> Signup and view all the answers

How is Total Return calculated?

<p>Dividend yield plus capital appreciation (A)</p> Signup and view all the answers

What does the Price Earnings Ratio (P/E Ratio) indicate about a firm's stock?

<p>The multiple at which the stock is valued based on earnings (A)</p> Signup and view all the answers

In the Zero-Growth Model, what is assumed about dividends?

<p>They will remain constant over time (D)</p> Signup and view all the answers

What is the assumption regarding growth rates (g) in the Constant Growth Model?

<p>g must be less than k (A)</p> Signup and view all the answers

How are forecasts of cash flows available to equity investors used in company valuation?

<p>To compute the value of a company's equity (C)</p> Signup and view all the answers

Which statement accurately reflects the Dividend Yield?

<p>It relates dividends per share to the market price of stock (C)</p> Signup and view all the answers

Flashcards

Ownership Equity

The residual interest in a company's assets after deducting liabilities. Represents the shareholders' investment in the company.

Retained Earnings

The accumulated net income of a company since its inception, minus any dividends paid to shareholders. Represents the portion of profits reinvested in the business.

Current Liabilities

Obligations due within one year or one operating cycle. These are short-term debts the company needs to pay back soon.

Working Capital Requirement (WCR)

The amount of capital required to finance the company's day-to-day operations. Calculated as Inventory + Accounts Receivable - Accounts Payable.

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Capital Employed

The total amount of capital used by the company in its operations. Includes non-current assets, working capital, and cash.

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Financial Analysis

The process of evaluating an entity's financial health, past, present, and future using financial statements to assess its performance, profitability, efficiency, liquidity, and capital structure.

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Balance Sheet

A snapshot of a company's assets, liabilities, and equity at a specific point in time. It shows what the company owns (assets), owes (liabilities), and the value of the owners' stake (equity).

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Non-Current Assets

Assets that are expected to be used for more than one year, also known as long-term assets. These include tangible assets like property, plant, and equipment (PP&E) that are depreciated over time and intangible assets such as patents, copyrights, and trademarks.

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Property, Plant & Equipment (PP&E)

Tangible assets used in the production or delivery of goods and services. These assets are depreciated over their useful life, meaning their value decreases over time.

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Intangible Assets

Assets with no physical form but have economic value. These include patents, copyrights, trademarks, and goodwill.

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Goodwill

An intangible asset representing the excess of the purchase price of a company over the fair value of its identifiable net assets. It signifies the value of a company's brand reputation, customer loyalty, and other unique strengths that are not directly quantifiable.

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Current Assets

Assets expected to be converted into cash within one year. These include items like accounts receivable, inventories, and prepaid expenses.

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Inventories

Items held for sale or used in the manufacture of products that will be sold. They can include raw materials, work-in-process, and finished goods.

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Gross Margin

Measures the profitability of each dollar of sales, after accounting for the direct costs of producing goods or services.

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Net Profit Margin

Represents the percentage of net profit earned for every dollar of revenue, after accounting for all expenses and taxes.

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Return on Assets (ROA)

Measures the efficiency of a company's asset utilization, indicating how much profit is generated for every dollar invested in assets.

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Return on Equity (ROE)

Measures the profitability of a company's equity, showing how much profit is generated for every dollar invested by shareholders.

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EBITDA Margin

Measures the profitability of a company's operations before accounting for interest, taxes, depreciation, and amortization. It indicates the core operating efficiency of the business.

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Operating Cash Flows

Cash flows generated from the normal day-to-day business activities of a company.

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Investing Cash Flows

Cash flows related to the purchase and sale of long-term assets, such as property, plant, and equipment (PPE).

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Financing Cash Flows

Cash flows related to changes in a company's capital structure, such as issuing stock, borrowing money, or repaying debt.

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Positive Operating Cash Flows

When the company has more cash flowing in from its operations than it spends on its operations.

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Negative Investing Cash Flows

When the company spends more cash on acquiring new assets than it receives from selling old ones.

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Positive Financing Cash Flows

When the company raises more cash from issuing stock or borrowing money than it uses to repay debt or pay dividends.

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Trend Analysis

A technique that tracks changes in financial data over time to identify trends or patterns.

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Industry Comparisons

A technique that compares a company's financial performance to its competitors in the same industry.

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Invested Capital

The total amount of funds used by a company to finance its operations. It's the sum of equity (shareholders' investment) and financial debt.

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Investment Cycle

The part of a company's operations related to acquiring and using long-term fixed assets (like buildings or equipment). It focuses on generating long-term value for the company.

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Operating Cycle

The process of converting short-term resources (like inventory) into cash through sales. It represents the core business activity of the company.

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Cash Cycle

The time it takes from paying for raw materials to collecting cash from customers. It reflects how efficiently the company manages its cash flow.

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Profit & Loss Account (PnL)

A financial statement that shows the company's revenue, expenses, and ultimately, its profit or loss for a specific period. It helps understand a company's financial performance.

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Earnings per Share (EPS)

Represents a company's profit allocated to each outstanding share of common stock. It's a key indicator of profitability and is widely used by investors to gauge a company's performance.

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Dividend Payout Ratio

The percentage of a company's earnings that is paid out to shareholders as dividends. It indicates how much of a company's profits are distributed and how much is retained for reinvestment.

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Dividend Yield

The annual dividend per share divided by the stock's current market price. It measures the return on investment from dividends alone.

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Total Return

The total return on an investment in stocks, combining both dividend yield and capital appreciation (stock price increase).

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Price Earnings Ratio (P/E Ratio)

A valuation metric that relates a company's stock price to its earnings per share. It reflects investors' expectations about a company's future earnings growth potential.

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Zero-growth Model

A dividend discount model (DDM) that assumes a constant dividend payout over time, without any growth. The value is calculated as a perpetuity.

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Constant Growth Model

A dividend discount model that assumes a constant growth rate in dividends, typically driven by earnings growth. It calculates the present value of future dividends, assuming a steady increase.

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Required Rate of Return (k)

The minimum return an investor expects to earn for investing in a particular company. It reflects the risk associated with the investment.

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Study Notes

Financial Analysis Introduction

  • Resources providers want reimbursement or company growth.
  • Recipients of goods or services need internal management to improve decisions making capacity, benefiting shareholders and improving shareholder value.
  • Regulators (e.g., tax offices) regulate companies via corporate regulators.

Financial Health Analysis

  • Evaluating a company's financial past, present, and future is important for decision-making.
  • Annual reports (Balance Sheet, Income Statement, Cash Flows Statement) contain crucial financial information.
  • Investors and financial analysts assess a company's profitability, efficiency, liquidity, capital structure, and market performance.

Balance Sheet

  • Balance sheets are prepared on a specific date, marking the end of an accounting period.
  • The European balance sheet format displays assets and liabilities into 'non-current' (long term) and 'current' (short-term) segments.
  • Examples of assets include Property, Plant, and Equipment (PP&E).

Current Assets

  • Current assets are converted to cash within a year.
  • Examples include account receivables, inventories (raw materials, work in process, finished goods), prepaid expenses, and cash.

Equity

  • Equity represents the ownership portion of a company's capital.
  • It includes paid-up capital (ordinary shares), additional paid-in capital, and retained earnings.

Non-current liabilities

  • These are debts due after one year or operating cycle.
  • Includes long-term debt (bonds, bank loans, mortgages).

Current liabilities

  • These debts must be paid within one year or an operating cycle.
  • Examples include accounts payables, notes payable, short-term debt, accrued expenses, unearned revenue, and tax liabilities.

Capital Employed

  • Capital employed refers to how much capital is used and financed within a company's activities.
  • Working capital requirement (WCR) = Inventory + Accounts receivable (AR) – Account payable (AP).
  • Invested Capital = Equity + Financial Debt

Consolidation

  • Companies combine their financial statements for a better overall picture (e.g., consolidated business operations).
  • Full Consolidation happens when a parent company owns more than 50% of the voting rights.
  • Minority interests appear in the balance sheets and income statements when consolidation takes place.

Income Statement

  • The income statement measures financial performance over a given period (like a year).
  • It details revenues and expenses to arrive at net income/profit or loss.
  • This is calculated in two steps: revenue identification and cost matching.

Cash Flow Statement

  • The cash flow statement records cash inflows and outflows over a certain period.
  • It is essential for understanding the company's ability to generate cash from its operations and investments.
  • It is divided into three main categories: operating activities, investing activities, and financing activities.

Financial Ratio Analysis

  • Ratios analyze a company's financial health by comparing key figures on the statement.
  • Profitability ratios (e.g., gross margin, net profit margin, return on assets) assess overall performance.
  • Liquidity ratios (e.g., current ratio, quick ratio, cash ratio) measure the ability to meet short-term obligations.
  • Leverage ratios (e.g., equity ratio, debt to equity ratio) evaluate the firm's financial structure.
  • Market performance ratios (e.g., EPS, dividend yield per share) represent the firm's stock performance within the market.

Company Valuation

  • Valuation techniques, like discounted cash flows, evaluate a company's worth.
  • The zero-growth model and the constant-growth model are two key valuation methods.

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Description

Test your knowledge on financial analysis concepts, including the importance of evaluating a company's financial health and understanding balance sheets. This quiz covers key financial statements and their roles in decision-making for stakeholders and regulators. Assess your grasp of financial terminology and principles vital for effective management and investment.

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