Question

4. What is the formula used to calculate Return on Assets (ROA)
5. List the two ways that ROA be too high?
6. What is the formula used to calculate Return on Equity (ROE)
7. ROE is a good indication of whether the company is capable of _________________________________________________________________________________________________________________________________
8. What is operating leverage? __________________________________________________________________________________________________________________________________
9. What is financial leverage? __________________________________________________________________________________________________________________________________
10. What is the formula used to calculate the Debt-To-Equity ratio (D/E)
11. What does a D/E greater than one mean?
12. What is the formula used to calculate the Current Ratio?
13. A current ratio that is too high can indicate __________________________________________________________________________________________________________________________________
14. What is the formula used to calculate the Quick ratio?
15. What is the formula used to calculate Days in Inventory (DII)?
16. What is the formula used to calculate Inventory Turns?

23 The lower the DII and the higher Inventory turns indicates ____________________________________________________________________________________________________________________________________

24.What is the formula used to calculate Days Sales Outstanding (DSO)?

25. Careful management of DSO can ____________________________________________________________________________________________________________________________________
26. What is the formula used to calculate Days Payable Outstanding (DPO)?
27. Watching DPO is a way of ensuring that the company ____________________________________________________________________________________________________________________________________
28. What is the formula used to calculate Property, Plant and Equipment turnover (PPE)
29. What affect does leased property have on the PPE calculation?
30. What is the formula used to calculate Total Asset Turnover?
31. What is the formula used to calculate Earnings Per Share (EPS)
32. What is EBITDA?
33. What is the formula used to calculate the Price-to-Earnings ratio (P/E)?
34. Historically, most businesses have traded in public markets at P/E ratios of __________________

Answer 1

• Return On Assets or ROA is a profitability ratio that indicates how much profit a company has generated from its assets. ROA is expressed as a percentage and a higher percentage signifies that company has utilised assets efficiently in generating earnings.

Formula for ROA is:

ROA= Net Income / Average Total Assets

Average total assets can be found on company's balance sheet and net income or net profit is the amount at the bottom that remains after all expenses in the income statement.

• ROA can be too high either when net income is increased or by reducing the average assets. For example: Net income can be increased by increasing the sales or revenue and average assets can be decreased by reducing the inventory lying idle with the business.
• Return on Equity or ROE is a measure of financial performance that signifies how much earnings are generated using the shareholder's equity.

Formula for ROE is:

ROE= Net Income / Average shareholder's equity

Net income or net profit is the amount at the bottom that remains after all expenses in the income statement and shareholder's equity is the owner's claim after subtracting total liabilities from total assets.

• ROE is a good indication of whether the company is capable of efficiently managing and generating the income from the money raised by shareholders. It indicates if the company has been successful in providing good returns to investors.