D366 Financial Statement Analysis - Set 4 - Part 1

Correct Answer: Net income divided by revenue

Net profit margin equals net income divided by revenue, expressed as a percentage. It shows how much of each dollar of sales becomes profit after all expenses, interest, and taxes.

Correct Answer: Net income divided by total assets

ROA equals net income divided by total assets. It measures how efficiently a company uses its assets to generate profit; a higher ROA indicates more effective asset utilization.

Correct Answer: Shareholders' equity

ROE equals net income divided by shareholders' equity. It shows how much profit a company generates for each dollar of equity invested by shareholders, a key measure of profitability to owners.

Correct Answer: 20%

Net profit margin equals $80,000 divided by $400,000, which is 0.20 or 20%. Twenty cents of every sales dollar becomes net profit.

Correct Answer: The equity multiplier

The DuPont framework breaks ROE into three drivers: net profit margin (profitability), total asset turnover (efficiency), and the equity multiplier (leverage). This shows what factors drive a company's return on equity.

Correct Answer: Uses its assets to generate sales

Total asset turnover equals revenue divided by total assets. It measures how efficiently a company uses its assets to generate sales; a higher ratio indicates more sales produced per dollar of assets.

Correct Answer: Cost of goods sold divided by average inventory

Inventory turnover equals cost of goods sold divided by average inventory. It shows how many times a company sells and replaces its inventory during a period; higher turnover suggests efficient inventory management.

Correct Answer: Collect payment from its credit customers

Days sales outstanding measures the average time to collect accounts receivable after a sale. A lower DSO indicates faster collection and more efficient management of receivables.

Correct Answer: 4 times

Inventory turnover equals $600,000 divided by $150,000, which is 4 times. The company sold and replaced its inventory four times during the period.

Correct Answer: Managing production costs or pricing more effectively

An increasing gross margin suggests the company is either raising prices, lowering production costs, or improving its product mix, all of which increase the profit retained from each sales dollar before operating expenses.

Correct Answer: Operating income (EBIT)

Operating profit margin equals operating income (EBIT) divided by revenue. It measures profitability from core operations before the effects of interest and taxes.

Correct Answer: Net credit sales divided by average accounts receivable

Accounts receivable turnover equals net credit sales divided by average accounts receivable. A higher ratio indicates the company collects its receivables more frequently and efficiently.

Correct Answer: Increasing margin, turnover, or leverage

The DuPont model shows that ROE rises when a company improves its net profit margin, increases asset turnover, or uses more financial leverage (equity multiplier), though more leverage also adds risk.

Correct Answer: Net income available to common shareholders divided by weighted average shares outstanding

Basic EPS equals net income available to common shareholders divided by the weighted average number of common shares outstanding. It indicates the profit attributable to each share.

Correct Answer: A high-volume, low-margin discount retailer

High asset turnover with low margins is typical of discount retailers that rely on high sales volume and thin margins. Luxury businesses tend to have higher margins but lower turnover.

Correct Answer: 365 divided by inventory turnover

Days inventory outstanding equals 365 divided by the inventory turnover ratio (or average inventory divided by COGS times 365). It estimates the average number of days inventory is held before being sold.

Correct Answer: Return on equity

Return on equity directly measures profit generated per dollar of shareholders' equity, making it the most relevant ratio for assessing returns to the company's owners.

Correct Answer: 20%

Under the DuPont relationship, ROE equals ROA times the equity multiplier: 8% multiplied by 2.5 equals 20%. Leverage amplifies the return on assets into a higher return on equity.

Correct Answer: Slower collection of customer payments

A falling receivables turnover means the company is collecting from customers more slowly, which ties up cash in receivables and may signal weakening credit policies or customer financial difficulty.

Correct Answer: Gross profit divided by revenue

Gross profit margin equals gross profit (revenue minus cost of goods sold) divided by revenue. It reflects the percentage of sales remaining after covering the direct costs of goods sold.