CMC Financial Analysis & Business Performance 2 — Questions and Answers
Question 1: A company reports EBITDA of $5M and total debt of $20M. What is the Debt/EBITDA ratio, and what does a ratio above 4x typically signal?
- 4x; manageable leverage for most industries
- 4x; potential overleveraging that may concern lenders (Correct answer)
- 0.25x; strong debt coverage capacity
- 0.25x; insufficient cash generation relative to debt
Correct answer: 4x; potential overleveraging that may concern lenders
Debt/EBITDA = $20M / $5M = 4x, which often signals overleveraging as lenders typically prefer ratios below 3–4x.
Question 2: Which financial metric best measures how efficiently a company converts sales into actual cash received from customers?
- Gross profit margin
- Days Sales Outstanding (DSO) (Correct answer)
- Return on Assets (ROA)
- Operating leverage ratio
Correct answer: Days Sales Outstanding (DSO)
DSO measures the average number of days it takes to collect receivables after a sale, reflecting collection efficiency.
Question 3: A consultant notices a firm's gross margin is stable at 40% but net margin has fallen from 12% to 6%. The most likely cause is:
- Declining revenue with fixed costs unchanged
- Rising cost of goods sold relative to revenue
- Increased SG&A, interest, or tax expenses below the gross profit line (Correct answer)
- Improved asset utilization reducing depreciation
Correct answer: Increased SG&A, interest, or tax expenses below the gross profit line
Stable gross margin with a falling net margin indicates cost pressures are occurring below the gross profit line, such as SG&A, interest, or taxes.
Question 4: In DuPont analysis, a company improves its ROE from 10% to 15%. If net profit margin and financial leverage are unchanged, what drove the improvement?
- Increased asset turnover (Correct answer)
- Higher debt-to-equity ratio
- Tax rate reduction
- Lower cost of goods sold
Correct answer: Increased asset turnover
DuPont breaks ROE into margin × asset turnover × leverage; with margin and leverage fixed, only higher asset turnover explains the ROE improvement.
Question 5: A business has a contribution margin ratio of 35% and fixed costs of $700,000. What is the breakeven revenue?
- $245,000
- $1,050,000
- $2,000,000 (Correct answer)
- $700,000
Correct answer: $2,000,000
Breakeven revenue = Fixed Costs / Contribution Margin Ratio = $700,000 / 0.35 = $2,000,000.
Question 6: When benchmarking a company's financial performance against industry peers, which of the following adjustments is most critical for comparability?
- Restating all companies to the same fiscal year-end
- Normalizing for one-time items and different accounting policy choices (Correct answer)
- Excluding all intangible assets from balance sheet comparisons
- Converting all foreign revenues to USD at spot rates
Correct answer: Normalizing for one-time items and different accounting policy choices
Normalizing for non-recurring items and accounting policy differences (e.g., LIFO vs. FIFO, capitalization vs. expensing) is essential for meaningful peer benchmarking.
Question 7: A manufacturing client's inventory turnover dropped from 8x to 5x year-over-year while sales remained flat. The most actionable consultant recommendation would be to:
- Increase the advertising budget to boost sales velocity
- Investigate excess stock buildup, slow-moving SKUs, and procurement practices (Correct answer)
- Accelerate accounts payable to preserve cash
- Refinance long-term debt to reduce interest costs
Correct answer: Investigate excess stock buildup, slow-moving SKUs, and procurement practices
A falling inventory turnover with flat sales signals inventory is accumulating, requiring investigation of procurement, demand forecasting, and SKU rationalization.
CMC Financial Analysis & Business Performance 2
A company reports EBITDA of $5M and total debt of $20M.
What is the Debt/EBITDA ratio, and what does a ratio above 4x typically signal?