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MGMT 2 > Slides 8 > Flashcards

Slides 8 Flashcards

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1
Q

What is the formula for calculating EBITDA?

A

Revenues - Operating Costs

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

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2
Q

What does ROTA stand for?

A

Return on Total Assets

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3
Q

What do profitability ratios measure?

A

The capacity to preserve the income equilibrium in the future

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4
Q

What do financial strength ratios measure?

A

The financial stability of a company

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5
Q

What do liquidity ratios measure?

A

The capacity for the company to pay bills as they arrive

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6
Q

What is the importance of time series comparisons in profitability ratios?

A

Indicates that a higher profitability ratio compared to previous periods shows the company is doing better than before

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7
Q

What is cross-sectional comparison in profitability ratios?

A

Comparing a company’s profitability ratio to its competitors to infer better performance

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8
Q

What is a key consideration when making profitability comparisons?

A

Comparisons need to be meaningful

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9
Q

What is the formula for calculating ROTA?

A

EBIT / Total Assets

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10
Q

What does a higher ROTA indicate?

A

Management is effectively using assets to generate an opening surplus

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11
Q

What are the components needed to calculate ROTA?

A
  • EBIT
  • Total Assets
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12
Q

What is the formula for Return on Sales (ROS)?

A

EBIT / Total Sales

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13
Q

What does Asset Turnover measure?

A

The ability of the firm to generate large sales with the lowest possible amount of assets

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14
Q

What are the standards for a good profit margin?

A

Higher than 10% is considered good

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15
Q

How can firms improve ROTA?

A

By focusing on variables that impact ROTA through targeted efforts

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16
Q

What is the formula for Return on Equity (ROE)?

A

Net Income / Owners’ Funds

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17
Q

What is the significance of a high ROE?

A

Compensates shareholders for risk and helps attract new funds

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18
Q

What does a declining asset turnover ratio imply?

A

Firms are incurring inefficiencies or not using resources at full capacity

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19
Q

True or False: ROTA can be improved directly.

A

False

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20
Q

What is the role of the operating profit model in improving ROTA?

A

Specifies fundamental variables that drive ROTA

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21
Q

What is the interpretation of a company’s ROS?

A

Identifies profit as a percentage of sales

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22
Q

What does a higher asset turnover indicate?

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A

The firm is generating more revenue per euro of assets

23
Q

What are two useful metrics for improving asset turnover?

Study These Flashcards
A
  • Average inventory days
  • Collection period
24
Q

What is the impact of comparing companies in different sectors?

Study These Flashcards
A

Useless for performance evaluation

25
What is the relationship between ROTA and competitive advantage?
Higher ROTA than industry average indicates a competitive advantage
26
What does a decreasing ROS indicate?
Could signal troubles for the company
27
What does ROE stand for?
Return on Equity
28
What does ROE measure?
The absolute return delivered to shareholders
29
Why is a good ROE important for a company?
It makes it easy to attract new funds and enables the company to grow
30
How is ROE calculated?
Net income / Owners’ funds
31
What is an acceptable ROE value?
Greater than 10% is usually good
32
What should ROE be compared to for risk assessment?
It should exceed the cost of debt
33
What is the relationship between ROE and ROTA?
ROE is usually higher than ROTA
34
What does the interest coverage ratio indicate?
How many times a firm’s operating income exceeds interest expenses
35
What happens when the interest coverage ratio is less than 1?
<1 means bad financial situation, indicating economic loss
36
What does a debt-to-equity ratio greater than 2 indicate?
Excessive risk in the capital structure
37
What does a debt ratio indicate?
The part of assets financed by debt
38
What are the three components that determine the interest coverage ratio?
* Operating profit * Total amount borrowed * Effective rate of interest
39
What is financial leverage?
The use of debt to increase the potential return on equity
40
What is the formula for calculating ROE using financial leverage?
ROE = (Net income / Sales) * (Sales / Total assets) * (Total assets / Equity)
41
What are the risks associated with increasing debt/equity?
* Increases ROE * Increases corporate risk
42
What should companies consider when using financial leverage?
Use with caution, especially in times of high uncertainty
43
What is the financial strength ratio associated with?
The ability to meet interest and principal payments in the long run
44
What does the structure of capital refer to?
The composition of debt and equity
45
What is the result of a high corporate risk?
Higher likelihood of going out of business
46
What are the financial charges generated by debt?
* Interest * Payment of the principal
47
Fill in the blank: Debt + Equity = _______
Total Assets
48
True or False: Higher ROE makes it difficult to attract new funds.
False
49
What does a debt ratio of 0.5 indicate?
A debt-to-equity ratio of 1
50
What should firms combine with ROE for better analysis?
Other indexes, particularly ROTA and solvency indicators
51
What does a debt ratio of less than 1 indicate?
The company is over-capitalized
52
What is a negative interest coverage ratio indicative of?
The firm usually has an economic loss
53
What is the definition of profitability ratios?
Ratios that assess a company's ability to generate profit relative to its revenue or assets

MGMT 2 (23 decks)

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