FSA MODULE 37

Question 1

37.1 Reminder of the 6 step framework for financial statement analysis:

Answer 1

We are now more on steps 3 + 4

Question 2

37.1 What is the value of ratio analysis?

Answer 2

Question 3

37.1 What are the limitations of financial ratios?

Answer 3

range of acceptable values - requires subjectivity

Question 4

37.1 What do you have to disclose in segmental reporting?

Answer 4

When we lookout divisions or operations that are either more than 10% of sales, operating profits, or total assets

Question 5

37.1 What are some vertical size common statements - how are they calculated?

Answer 5

If these ratios are stable over time - they could be very useful for forecasting over time

Question 6

37.1 What are vertical common-size statements useful for?

Answer 6

Question 7

37.1 What are horizontal common size-statements?

Answer 7

You do ratios relative to a base year!

Useful for trend analysis over time

Question 8

37.1 Name some general ratio rules:

Answer 8

If the numerator and the denominator come from the same financial statement, what do we call them?

Question 9

37.1 If the numerator and the denominator come from the same financial statement, what do we call them?

Answer 9

PURE

Question 10

37.1 If the numerator and the denominator do not come from the same financial statement, what do we call them?

Answer 10

MIXED

so we would have to find the average balance sheet figure - as this I static, whilst the income statement is dynamic

Question 11

37.1 What are the categories of ratios?

The four categories of ratios and what they look at.

Answer 11

Question 12

37.1 What are the four activity ratios?

Answer 12

Question 13

37.1 What is the equation for inventory turnover?

Answer 13

mixed ratio - so we take an average of balance sheet inventory (last sheets figure plus this year’s divided by 2)

Question 14

37.1 What is the equation for Days of inventory on hand (DOH)?

Answer 14

Number of days between receiving raw materials and selling finished goods

so (raw materials holding period + production period + finished goods holding period)

Question 15

37.1 What is the equation for receivables turnover?

Answer 15

how many times customers pay you in a year basically - but easier to think about it in days sales outstanding calc!

Question 16

37.1 What is the equation for days of sales outstanding?

Answer 16

Should equate to our credit period you offer customers

Question 17

37.1 What are the 7 activity ratios?

Answer 17

also:

Fixed asset turnover = revenue/average net fixed assets

working capital turnover = revenue/average working capital

total asset turnover = revenue/average total assets

Question 18

37.1 What is the equation for payables turnover?

Answer 18

Question 19

37.1 What is the equation for number of days of payables?

Answer 19

number of days between receiving raw materials into our facilities, and paying our suppliers (how long it takes to pay suppliers)

Question 20

37.1 What is the equation for working capital turnover?

Answer 20

Question 21

37.1 What is the equation for working capital?

Answer 21

Question 22

37.1 What is the equation for fixed asset turnover?

plus - what does ‘net’ mean here

Answer 22

NET = just equals net of accumulated appreciation

Question 23

37.1 What is the equation for working capital turnover?

Answer 23

Question 24

37.1 What is the equation for total asset turnover?

Answer 24

Question 25

37.1 What are the 4 liquidity ratios?

Answer 25

Question 26

37.1 What is the equation for current ratio?

Answer 26

Basic rule is that if this drops below 1, then we may have an issue with paying off our current liabilities But it might not! Need to look at other ratios

Question 27

37.1 What is the equation for the quick ratio?

Answer 27

This strips out anything illiquid from current assets Current assets - Inventory / current liabilities WOULD BE A FAIR PROXY OF THE QUICK RATIO FOR EXAM

Question 28

37.1 What is the equation for cash ratio?

Answer 28

This is the ultimate ratio in terms of liquidity

Question 29

37.1 What is the equation for defensive interval ratio?

Answer 29

shows how long could the firm continue to operate with no new cash incoming

Question 30

37.1 Describe the cash conversion cycle: plus - which part of this is the operating cycle? How do we calculate it?

Answer 30

Question 31

37.2 Name the five solvency ratios:

Answer 31

AND debt-to equity ratio = total debt/total shareholders equity financial leverage ratio = average total assets/average total equity

Question 32

37.2 What is the equation for the total debt ratio?

Answer 32

excludes lease liabilities - in the syllabus

Question 33

37.2 What is the equation for the debt-to-assets ratio?

Answer 33

Question 34

37.2 What is the equation for the debt-to-capital ratio?

Answer 34

showing the proportion of debt in our capital structure total debt - all short terms and long term liabilities

Question 35

37.2 What is the equation for debt-to-equity ratio?

Answer 35

Question 36

37.2 What is the equation for financial leverage ratio?

Answer 36

sometimes called the financial average multiplier

Question 37

37.2 Name two coverage ratios:

Answer 37

Question 38

37.2 What is the equation for interest coverage?

Answer 38

safety ratio brought into many debt covenants NOTE - If you add back the capitalised interest to the denominator, you must also add back the additional depreciation to the numerator

Question 39

37.2 What is the equation for fixed charge coverage?

Answer 39

Question 40

37.2 What is the equation for the number of years it would take to pay off debt?

Answer 40

Question 41

37.2 profitability ratios: name 4 return on sales ratios:

Answer 41

Question 42

37.2 What is the equation for gross profit margin?

Answer 42

NET REVENUE

Question 43

37.2 What is the equation for operating profit margin?

Answer 43

EBIT is a proxy for operating income NET REVENUE

Question 44

37.2 What is the equation for pretax margin?

Answer 44

NET REVENUE

Question 45

37.2 What is the equation for net profit margin?

Answer 45

NET REVENUE

Question 46

37.2 Profitability ratios: name 5 return on investment ratios:

Answer 46

AND ROE = net income/average total equity Return on common equity = net income - preferred dividends / average common equity

Question 47

37.2 What is the equation for return on assets: and how would we calculate an adjusted ROA?

Answer 47

net income = equity total assets = liabilities + equity Could be asked to do adjusted, if not, do the usual

Question 48

37.2 What is the equation for operating ROA:

Answer 48

Question 49

37.2 What is the equation for return on invested capital: What is NOPLAT vs NOPAT (might not need to know)

Answer 49

L = less adjusted taxes invested capital = long-term debt + shareholders equity OR current assets + long term debt - current liabilities

Question 50

37.2 What is the equation for return on equity?

Answer 50

Question 51

37.2 What is the equation for return on common equity?

Answer 51

REMEMBER A = L + E

Question 52

37.2 What is the equation for constant growth:

Answer 52

retention rate = 1 - payout ratio constant growth is the growth rate in our earnings which we can sustain without needing to raise any additional equity financing

Question 53

37.2 Describe a two stage DuPont:

Answer 53

Question 54

37.2 Describe a three stage DuPont:

Answer 54

Can use this to assess different variables within the main equation

Question 55

37.2 Describe a 5 stage DuPont:

Answer 55

Question 56

37.2 What can common-size statements and ratios be used to model/forecast results using?

Answer 56

Question 57

37.1 What is the cash conversion cycle formula?

Answer 57

CCC = average receivables collection period (365/average receivables turnover) + average inventory processing period (365/inventory turnover) - payables payment period (365/payables turnover ratio)

Question 58

37.1 When calculating roe do you include retained earnings within total equity?

Answer 58

YES

Question 59

37.1 With a vertical common-size income statement, all income statement accounts are divided by ...

Answer 59

Sales

Question 60

37.1 What is the coefficient of variation?

Question 61

37.1 Return on equity using the traditional DuPont formula equals:

Answer 61

(net profit margin) (total asset turnover) (financial leverage multiplier).