IFA Financial Analysis & Decision Making Flashcards

What does the return on capital employed (ROCE) ratio measure?

Answer: The efficiency with which a company generates profit from its total capital

ROCE (Operating Profit ÷ Capital Employed) measures how efficiently a company uses all its capital — both equity and debt — to generate operating profit.

Which analysis technique compares a company's ratios to industry benchmarks?

Answer: Benchmarking (cross-sectional analysis)

Benchmarking or cross-sectional analysis compares a company's financial ratios to industry averages or competitor figures to assess relative performance.

What is a break-even analysis used for in decision making?

Answer: Determining the sales level at which total revenue equals total costs

Break-even analysis identifies the sales volume at which total revenue equals total costs, meaning the company earns zero profit or loss.

Sensitivity analysis in financial modeling is used to:

Answer: Test how changes in key assumptions affect the outcome of a decision

Sensitivity analysis changes one variable at a time (e.g., sales volume, price) to assess how sensitive a financial outcome like NPV or profit is to that assumption.

What is working capital and why is it important?

Answer: Current assets minus current liabilities; it measures short-term operational liquidity

Working capital (Current Assets − Current Liabilities) represents the liquid resources available for day-to-day operations, and insufficient working capital can cause insolvency.

Which profitability ratio measures the return earned on shareholders' investment?

Answer: Return on equity (ROE)

Return on equity (Net Income ÷ Shareholders' Equity) measures how effectively management generates profit from the equity shareholders have invested.