MCQs- CHAPTER 9- CORPORATE ACTIONS

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.

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.

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.

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.

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.

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.

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.

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.

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 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 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.

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.

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.

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.

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.

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

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.

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

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.

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.