7.12 Chapters 5 – 7: Review Questions
- Calculate as many financial ratios as you can using the company from the last problem set. Average your data where advised.
- For each ratio, provide some written commentary and analysis.
- See how many ratios from each of our six categories you know already by rote memory.
- Liquidity
- Solvency
- Profitability
- Turnover
- Return
- Market Ratios
- How are the Liquidity and Solvency ratio categories different from one another?
- Why do we use 360 in calculating the Average Collection Period (ACP)? Under what rationale may 365 days be advised?
- In the ACP, why are Credit Sales, in most cases, larger than Accounts Receivable?
- Why do we use EBIT, and not Net Income, in calculating the Return-on-Assets?
- Why don’t we utilize the accountant’s net worth figure as a metric for company value?
- How do Price/Earnings and Price-to-Book ratios illustrate a company’s value?
- Define “Longitudinal” and “Cross-sectional.” How can you use these concepts in your company analysis?
- What is the end-goal of Ratio Analysis?
- How is it that a strong company, e.g., Walmart, operates with negative Working Capital? What is your view?
- What benefits does the Aging Schedule provide?
- What is the relationship between a Debt-to-Total Assets ratio and a company’s Times Interest Earned ratio?
- What industries tend to have great amounts of Debt relative to Assets? How do they manage to accomplish this without increasing their default risk?
- What benefit might there be to using the Debt-to-Assets rather than the more popular Debt-to-Equity ratio?
- Is a low TIE Ratio always a bad thing? Under what circumstances might a company tolerate a low ratio?
- Have you figured out yet whether ratios provide answers?
- What two key pieces of information does the DuPont Model focus on?
- In what technical, ratio-ways, are “Growth” and “Value” stocks different from one another?
- What is meant by “signaling”?
- What is meant by a “Liquidity Premium”?
- Provide some reasons why two companies, which are identical in all respects, might have radically different Turnover ratios?
- List and discuss some limitations of financial ratios?
- After all this, can you “handle the truth”?
