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BA B > Lecture 5: Performance Measurement > Flashcards

Lecture 5: Performance Measurement Flashcards

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1
Q

What is the purpose of performance measurement in internal financial management?

A

To quantify strengths and weaknesses of a company using financial ratios and systems.

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2
Q

How do simple financial ratios differ from ratio systems?

A

Simple ratios use external audited data; ratio systems use both internal and external data, including non-financial metrics.

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3
Q

What does performance measurement support?

A

Operating and strategic decision-making.

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4
Q

What are the main purposes of financial analysis?

A

Assess financial reporting, credit standing, company value, tax consulting, management performance, and financial planning.

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5
Q

What are limitations of financial analysis?

A

Lack of future orientation, incomplete data, and constraints from financial reporting standards.

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6
Q

What are the four steps of financial analysis?

A

Data Selection

Preparation

Analysis Method Selection

Assessment

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7
Q

What does the “Preparation” step involve?

A

Review, reclassification, adjustments, revaluation, and separating operational/non-operational values.

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8
Q

Which financial objectives are linked to financial ratios?

A

Return (profitability), Risk (leverage), Liquidity (cash flow).

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9
Q

Cash Ratio formula?

A

Cash & Equivalents / Short-Term Liabilities

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10
Q

Quick Ratio formula?

A

(Cash + Receivables) / Short-Term Liabilities

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11
Q

Current Ratio formula?

A

Current Assets / Short-Term Liabilities

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12
Q

Cash Flow Ratio formula?

A

Cash Flow from Operations / Short-Term Liabilities

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13
Q

Free Cash Flow formula?

A

Operating CF + Replacement Investment Outflows / Minimum Dividend

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14
Q

What does Free Cash Flow represent?

A

Disposable cash for debt, dividends, or reinvestment.

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15
Q

Days Sales Outstanding (DSO) formula?

A

(Average Receivables / Credit Sales) × 365

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16
Q

Months on Hand formula?

A

(Inventory / COGS) × 12 months

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17
Q

Amortization Duration formula?

A

Net Financial Debt / Free Cash Flow

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18
Q

Equity Ratio formula?

A

Equity / Total Assets

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19
Q

What does the equity ratio indicate?

A

Risk-bearing capacity and stability vs. return efficiency.

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20
Q

Equity to Non-Current Assets formula?

A

Equity / Non-Current Assets

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21
Q

Equity & Long-term Debt to Non-Current Assets formula?

A

(Equity + Long-term Debt) / Non-Current Assets

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22
Q

Return on Equity (ROE) formula?

A

Profit / Average Equity

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23
Q

Return on Assets (ROA) formula?

A

(Profit + Interest) / Average Total Assets

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24
Q

Return on Sales (ROS) formula?

A

Profit / Net Sales

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25
Gross Profit Margin formula?
Gross Profit / Net Sales
26
EBIT Margin formula?
EBIT / Net Sales
27
EBITDA Margin formula?
EBITDA / Net Sales
28
Return on Net Operating Assets (RONOA) formula?
NOPAT / Average NOA
29
ROI (Return on Investment) formula?
(Profit + Interest) / Average Assets
30
ROCE (Return on Capital Employed) formula?
EBIT / Average Capital Employed
31
ROIC (Return on Invested Capital) formula?
NOPAT / Average Invested Capital
32
What is a ratio system?
A structured combination of financial/non-financial metrics showing a complete financial view.
33
What are two types of ratio systems?
Calculation systems and Classification systems
34
What does the cash conversion cycle measure?
The time between investing in inventory and receiving cash from sales.
35
What is the Balanced Scorecard (BSC)?
A strategic management tool that translates an organization’s vision into performance metrics across four perspectives.
36
What are the four perspectives of the Balanced Scorecard?
Financial Customer Internal Business Processes Learning and Growth
37
How does the BSC integrate financial and non-financial data?
By combining metrics like customer satisfaction, employee training, and financial ratios into a unified framework.
38
What is the goal of the BSC?
Align business activities to strategy, improve communication, and monitor performance against strategic goals.
39
What does the Cash Ratio explain about a company's liquidity?
It shows how well a company can immediately cover short-term liabilities using only cash. It’s typically under 100% because firms prefer to invest excess cash for higher returns. Labor-intensive firms might maintain enough cash for 3–6 months of salaries.
40
What does the Quick Ratio indicate about short-term solvency?
It reflects the ability to pay short-term liabilities using cash and near-certain receivables. It's less conservative than the cash ratio, assuming receivables will convert to cash soon. Receivables can also be sold or legally enforced, though at a cost.
41
What insight does the Current Ratio provide?
It shows whether current assets can cover short-term liabilities within a year. A value above 100% is expected due to slower inventory turnover. Seasonal or JIT production can influence this, as some inventory may take longer to liquidate.
42
What does the Cash Flow Ratio reveal about financial strength?
It shows how much short-term debt could be paid using operational cash flow. Offers a more dynamic and reliable measure than static cash-based ratios.
43
What does Free Cash Flow tell us about a company’s flexibility?
It represents the cash available after regular investments and dividends. A consistently positive value means the company can fund debt repayment, special dividends, or investments. However, definitions vary widely, so use with care.
44
What does Days Sales Outstanding tell us?
It measures how long it takes customers to pay invoices, indicating liquidity and efficiency. A lower value is better; high values could mean collection issues. Compare debtor vs. creditor periods to assess cash flow timing.
45
What does Months on Hand indicate?
It shows how long inventory stays unsold. A short duration indicates good turnover; a long one may signal sales issues or stockpiling. Context like industry, logistics, and upcoming launches matters.
46
What insight does Amortization Duration provide?
It estimates how many years it would take to repay net financial debt using free cash flow. A shorter period indicates stronger debt service capability and lower financial risk.
47
What does the Equity Ratio indicate about a company's financial structure?
It measures the share of assets financed by equity. Equity bears risk but provides stability. A high ratio is safer but costlier; a low ratio can improve returns but increases risk. Related ratios include debt ratio and debt-to-equity ratio.
48
What insight does the Equity to Non-Current Asset Ratio offer?
It shows how much of the non-current assets are financed by equity. High-risk assets should be backed by equity. Using equity to finance low-risk assets is inefficient, while using debt to finance risky assets is dangerous.
49
What does the Equity and Long-Term Debt to Non-Current Asset Ratio tell us?
It assesses whether long-term capital covers long-term assets, following the “golden rule of financing.” Long-term assets should be funded with long-duration capital. This ensures liquidity and risk alignment, regardless of industry.
50
What does Return on Equity (ROE) reveal about investment efficiency?
It shows how well equity is generating profit. It must exceed interest on debt to justify equity risk. A low equity base increases ROE, but at the cost of higher leverage and risk
51
What does Return on Assets (ROA) measure in a business?
It evaluates the return on all invested capital before interest. Unlike ROE, it's unaffected by debt ratio. It reflects how efficiently total assets are used and is useful for comparing investments regardless of financing.
52
What does Return on Sales (ROS) indicate about operational efficiency?
It compares profit to net sales to gauge efficiency. Industries differ: production firms often show higher ROS than trading firms. It's affected by pricing, cost control, and margins.
53
What do Profit Margins like EBIT or EBITDA margins reveal?
They show how much profit remains at various stages of the income statement. EBITDA margin excludes depreciation/amortization, while EBIT includes them. Each gives insight into operational efficiency and cost structure.
54
What does RONOA (Return on Net Operating Assets) reflect?
It measures how efficiently operational assets generate after-tax operating profit (NOPAT). It excludes extraordinary effects and focuses on core business, offering a view of operational performance without financial noise.
55
What does ROI (Return on Investment) assess?
Identical to ROA in formula, ROI is often used for evaluating improvement of both current and non-current assets. It gives a holistic view of total investment returns.
56
What does ROCE (Return on Capital Employed) show?
It shows how well EBIT generates returns on capital employed, i.e., liabilities & equity minus non-interest-bearing debt. It helps in assessing asset productivity and is often used for performance benchmarks.
57
What insight does ROIC (Return on Invested Capital) offer?
It measures the return from invested capital after adjusting for tax. It excludes short-term, non-interest liabilities, focusing on long-term capital invested in the business.
58
What are Security-Oriented Ratios and what do they assess?
They evaluate the stability and long-term financial safety of a company by analyzing how assets are financed, especially with equity.
59
Which ratios are Security-Oriented?
Equity Ratio Equity to Non-Current Asset Ratio Equity and Long-Term Debt to Non-Current Asset Ratio
60
What are Profit and Return-Oriented Ratios and what do they assess?
These ratios measure a company’s ability to generate profit from its resources and investments, assessing efficiency and return on capital.
61
Which ratios are considered Profit and Return-Oriented?
Return on Equity (ROE) Return on Assets (ROA) Return on Sales (ROS) Profit Margin EBIT Margin EBITDA Margin Gross Profit Margin Return on Operating Assets (RONOA) Return on Investment (ROI) Return on Capital Employed (ROCE) Return on Invested Capital (ROIC)
62
What are Liquidity and Cash-Oriented Ratios and what do they assess?
These ratios evaluate the ability of a company to meet its short-term obligations using liquid assets or operating cash flows.
63
Which ratios are considered Liquidity and Cash-Oriented?
Cash Ratio Quick Ratio Current Ratio Cash Flow Ratio Free Cash Flow Days of Sales Outstanding (DSO) Months on Hand (Inventory Period) Amortization Duration Cash Conversion Cycle

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