Financial Analysis & Derivatives Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Financial Analysis & Derivatives flashcards as text
What is 'return on equity' (ROE) and why is it important?
Answer: A measure of a company's profitability relative to shareholders' equity, showing how efficiently management generates profit from equity capital
ROE = Net Income / Shareholders' Equity. It measures how much profit a company generates for each pound of shareholders' equity. High ROE indicates efficient use of equity capital. ROE is a key metric in the Du Pont analysis and for comparing companies in the same sector.
What does a company's 'balance sheet' show?
Answer: A snapshot at a point in time of what the company owns (assets), what it owes (liabilities), and the residual interest of shareholders (equity)
The balance sheet (statement of financial position) shows assets (what the company owns — current and non-current), liabilities (what it owes — current and non-current), and equity (net assets attributable to shareholders) at a specific point in time. Assets = Liabilities + Equity.
What is the 'current ratio' and what does it measure?
Answer: Current assets divided by current liabilities, measuring a company's ability to meet short-term obligations
Current ratio = Current Assets / Current Liabilities. It measures short-term liquidity — whether a company has sufficient current assets (cash, receivables, inventory) to cover its current liabilities (payables, short-term debt) due within one year. A ratio above 1 generally indicates adequate short-term liquidity.
What is 'free cash flow' (FCF) and why do analysts value it?
Answer: Cash generated from operations after deducting capital expenditure required to maintain or grow the business — the cash truly available to investors
FCF = Operating Cash Flow - Capital Expenditure. It represents cash generated by the business after maintaining and investing in its asset base. FCF is valued by analysts as it can be used for dividends, buybacks, debt repayment, or acquisitions without damaging operations.
What is 'earnings per share' (EPS) and why is it important?
Answer: Net profit attributable to ordinary shareholders divided by the weighted average number of shares, used as a basis for valuing shares
EPS = Net Profit / Weighted Average Shares Outstanding. It measures the portion of a company's profit allocated to each share and is the foundation for P/E ratios. Growing EPS indicates improving profitability per share, a key driver of share price appreciation.
What is 'debt-to-equity' (D/E) ratio and what does a high ratio indicate?
Answer: Total debt divided by shareholders' equity, measuring financial leverage; a high ratio indicates greater financial risk and dependence on debt financing
D/E ratio = Total Debt / Shareholders' Equity. It measures the degree of financial leverage. A high ratio means the company is heavily financed by debt relative to equity, increasing interest burden and financial risk, particularly in downturns, but potentially enhancing returns through leverage.