MCQs- CHAPTER 8- COMPANY ANALYSIS- FINANCIAL ANALYSIS

PAT Margin (Profit After Tax margin) indicates how much of the business generated by a company actually comes to shareholders. It is calculated by dividing PAT (Profit After Tax) by net sales. A higher PAT margin indicates that a larger proportion of the business's earnings is being retained by shareholders. Increasing margins over time suggest improving profitability.

Non-current liabilities represent obligations of the company that are fulfilled after one year, while current liabilities represent obligations fulfilled within one year.

Goodwill arises when a company acquires another business, and it represents the amount paid by the acquiring company over and above the fair value of the net assets taken over.

The total debt is calculated by summing long-term debt, current portion of long-term debt, short-term debt, financial lease obligations, and accrued interest. This helps in identifying the overall debt obligations of the company.

The current ratio measures a company's ability to meet its short-term obligations by comparing its current assets to its current liabilities. It indicates whether a company has enough current assets to cover its current liabilities.

The inventory turnover ratio determines the number of times a company's inventory is converted into sales. It is calculated by dividing sales by inventory. A higher ratio indicates that inventory is being sold quickly, which is beneficial for the business. Companies with fast-moving inventory are able to free up capital and minimize the risk of inventory obsolescence. However, different industries have varying ideal inventory turnover ratios. For example, FMCG (Fast-Moving Consumer Goods) companies typically have higher turnover ratios compared to capital goods companies. Monitoring this ratio helps assess the efficiency of inventory management and sales performance.

Ratio analysis is useful in financial statement analysis as it allows for the comparison of financial line items with related dat By expressing one line item as a percentage or multiple of another related line item, ratio analysis provides better insights into the financial performance and relationships between different elements of the financial statements. This comparison helps in understanding the relative proportions, trends, and overall financial health of the company.

Stand-alone financial statements represent the financial performance of an individual entity or subsidiary and may reflect sales limited to a specific geographic region. Consolidated financial statements combine the financial performance of all group companies, providing a more comprehensive view that includes sales from all subsidiaries and operations across different regions.

The income statement typically includes revenue, expenses, and net income. Changes in accounts receivables, changes in long-term debt, and changes in inventory are usually reported in the balance sheet or cash flow statement, not the income statement.

Auditors are unable to vouch for the accuracy of all transactions in a company due to the significantly large volume of transactions. It is practically impossible to individually verify each transaction for accuracy. Auditors primarily focus on assessing the control systems in place to ensure that transactions are captured and recorded accurately. Once satisfied with the control systems' working, they assess compliance with accounting standards and principles.

The profit and loss statement provides the financial performance of a firm for a given period, including its revenue, expenses, and net profit or loss.

Non-current assets include property, plant and equipment (PPE), goodwill, and intangible assets. Inventory is classified as a current asset.

The Interest Coverage Ratio compares a company's earnings with its interest expense to determine its ability to meet interest obligations. It is calculated by dividing EBIT (Earnings Before Interest and Taxes) by interest expense. A higher interest coverage ratio indicates that a company's earnings are comfortably able to cover its interest obligations. A ratio less than one or negative suggests that the company's earnings are insufficient to meet interest payments, which can indicate financial difficulties.

The financing cash flows section of the cash flow statement provides information about the funds borrowed or repaid by a company during a given perio

EBITDA Margin is a ratio that helps determine the profitability of a company based on its operations and direct costs. It is calculated by dividing EBITDA (earnings before interest, taxes, depreciation, and amortization) by net sales. A higher EBITDA margin indicates greater operational efficiency. This ratio is not affected by depreciation policies, funding decisions, or taxation rates, making it useful for identifying profitability trends in an industry.

Return on Capital Employed (ROCE) calculates the returns generated by a company for every rupee of capital employed, including both equity and debt. It is calculated by dividing EBIT (Earnings Before Interest and Taxes) by capital employe Capital employed can be calculated as total assets minus current liabilities or as total equity plus total debt. A higher ROCE indicates higher returns on the capital invested in the business, reflecting its efficiency and profitability.

The financial statements that listed companies need to publish include the balance sheet, statement of profit and loss account, statement of changes in shareholder's equity, and cash flow statement. The statement of changes in market capitalization is not a part of the required financial statements.

Ratio analysis helps gain insights by comparing financial line items with other related data points, providing better context and understanding.

"Other expenses" in the profit and loss account typically include expenses that are not independently large and are often combined and classified as other expenses. Companies provide notes to accounts that give more detailed disclosure on these expenses.

OCI stands for Other Comprehensive Income, which includes certain gains or losses on account of changes in the fair value of assets and liabilities that are required or permitted to be not recognized as part of income and expense.

The Debt/Equity (D/E) ratio assesses the extent of leverage used by a business and its ability to meet obligations arising from debt. It is calculated by dividing long-term debt by net worth. A high D/E ratio indicates a higher level of debt relative to equity, which can be risky for the business, especially during economic downturns. It is important for investors to consider the D/E ratio and other factors when evaluating a company's financial health and stability.

The format for the balance sheet is prescribed under Schedule 3 of the Companies Act 2013. It is applicable for all industries except those that have separate requirements from industry regulators.

True. A good analyst should monitor and track the disclosures, commitments, and deliveries of an organization regularly to assess its performance, financial health, and adherence to commitments made to stakeholders.

Forecasting based solely on historical data assumes that past behavior will continue in the future. However, this assumption may not hold true as the future of businesses could be significantly different from their past.

Core working capital for Bharti Airtel is calculated by summing inventory and trade receivables and subtracting trade payables. This calculation helps in considering only the essential working capital components related to core operations.

The Dupont analysis framework decomposes the return on equity (ROE) into multiple components to understand the company's drivers. It breaks down ROE as a product of three factors: net profit margin, asset turnover ratio, and leverage. By utilizing this framework, analysts gain a better understanding of how various factors contribute to ROE and can perform a diagnostic study to identify factors influencing changes in ROE. Dupont analysis provides valuable insights into a company's profitability, efficiency in asset utilization, and leverage effects on ROE.

A qualified report from auditors indicates that there are some serious discrepancies in the financial statements. This may arise when auditors disagree with the company's accounting policy or identify significant issues in the financial statements that affect their true and fair view. In such cases, auditors provide a detailed explanation for issuing a qualified report, highlighting the specific concerns or discrepancies they have identifie

Insiders' sales and purchase of stocks can provide insights into the company's performance and prospects. When insiders, such as promoters, buy stocks, it indicates their belief in the company's potential for future profits.

Depreciation refers to a gradual and permanent reduction in the value of tangible assets on account of aging, use, and obsolescence. Amortization, on the other hand, refers to the gradual write-off of intangible assets over the period of their life.

The asset turnover ratio measures how many times a company's assets are utilized to generate revenues. It is calculated by dividing net sales by total assets. A higher ratio indicates better utilization of assets to generate revenues. Companies strive to have a higher asset turnover ratio, as it signifies efficiency in capital deployment and revenue generation. By analyzing this ratio, analysts gain insights into the company's operational efficiency and its ability to generate returns from its assets.

Working capital is calculated by subtracting current liabilities from current assets. It represents the amount of money locked in day-to-day operations of the business.

The quick ratio is a more stringent measure of liquidity compared to the current ratio. It excludes inventories from current assets and is calculated by dividing the difference between current assets (excluding inventories) and current liabilities. The quick ratio provides a more conservative assessment of a company's ability to meet short-term obligations, as it focuses on assets that can be quickly converted into cash. It helps identify the company's immediate liquidity position without relying on slow-moving assets like inventories.

Consolidated financial statements are preferred for equity analysis because they provide a more comprehensive and holistic picture of the overall group performance, incorporating the financial results of all controlled subsidiaries. This broader perspective allows for a better assessment of the overall financial position and performance of the group as a whole.

Warren Buffett believes that projections and forecasts create an illusion of apparent precision. He places more importance on track records and company history rather than relying on projections.

A clean report is given when auditors have no issues with the report and believe it reflects a true and fair view.

Auditors' opinions in an audit report are based on their assessment of whether the financial statement presents a true and fair view of the accounting.

Investments in joint ventures/associates are reported using the equity method, where the value of the investment is measured by multiplying the fair value of the equity of the investees by the percentage of stake hel

The accounts receivable turnover ratio indicates how quickly a company converts its sales into cash. It is calculated by dividing revenue by accounts receivable. A higher ratio suggests that a smaller portion of the company's revenues are in the form of credit, indicating efficient cash conversion. A lower ratio may indicate that the company is offering more lenient credit terms or facing difficulties in collecting payments from customers. By monitoring this ratio, analysts gain insights into the company's credit management and its ability to realize cash from its distributors/clients.

Return on Equity (ROE) measures how a business allocates its capital and generates returns. It evaluates the productivity of each rupee invested in the business. ROE is calculated by dividing PAT (Profit After Tax) by net worth. A higher ROE indicates a more efficient allocation of capital and a better return generation. ROE can be further decomposed using the Du Pont Analysis to assess operating efficiency, asset turnover, and financial leverage.

Peer comparison in financial analysis allows analysts to understand how a company's financial metrics and ratios compare to those of its industry peers. It provides insights into the company's competitive position within the industry.

EPS stands for earnings per share. It is calculated by dividing the net profit attributable to equity shareholders by the average number of shares outstanding. It provides a measure of a company's profitability on a per-share basis.

Presenting comparative financials for a prior period in financial statements helps provide insights into the historical performance of the company, allowing stakeholders to assess trends and changes over time.

The current ratio compares a company's current assets to its current liabilities. A ratio of more than 1 indicates that the company has more current assets than current liabilities, which signifies a favorable liquidity situation. The current ratio reflects the company's ability to meet short-term obligations and is also known as the working capital ratio. By assessing the components of working capital, such as trade receivables, inventory, and trade payables, analysts gain insights into the company's liquidity position and working capital management.

The auditors' qualifications in the notes to accounts are a useful part of the annual report as they provide insights into the quality of accounting. They highlight any concerns or discrepancies in the financial statements, helping readers understand the reliability and accuracy of the information presente

The change in accounting period can lead to confusion while comparing previous years' numbers.

Core working capital is calculated by considering inventory, trade receivables, and trade payables. It excludes short-term investments and other non-operational current assets and liabilities.

Studying a company's history of equity expansion allows investors to understand how the issuance of additional equity shares has affected the ownership stake of existing shareholders. This information helps evaluate the potential dilution of existing shareholders' ownership.

Revenue represents the amount earned by a company by selling goods and services. It includes income from sources that are part of its core operations or are incidental thereto.