Topic_6_Financial_Statement_Analysis_Flashcards
(10 cards)
What is the purpose of financial statement analysis?
To evaluate past performance and forecast future outcomes.
What is horizontal analysis?
Comparing line item changes over time.
What is vertical (common-size) analysis?
Expressing each item as a % of total (e.g., sales or assets).
What does the current ratio measure?
A company’s ability to pay short-term obligations.
What does the debt ratio show?
How much of a company’s assets are funded by debt.
What is the DuPont formula for ROE?
ROE = (Net Income/Sales) × (Sales/Assets) × (Assets/Equity).
What does asset turnover measure?
Efficiency—how well assets generate sales.
When might return on sales be low but acceptable?
In high-turnover industries with low margins, like retail.
What is a limitation of ratio analysis?
Ratios rely on historical data and may not reflect current conditions.
Why are financial ratios more useful when benchmarked?
They provide context for interpretation by comparing to industry or past results.
