IFA Financial Analysis & Decision Making Flashcards

What does a current ratio of less than 1 indicate?

Answer: The company has more current liabilities than current assets

A current ratio below 1 means the company's current liabilities exceed its current assets, indicating potential short-term liquidity problems.

Which financial ratio measures how efficiently a company uses its assets to generate revenue?

Answer: Asset turnover ratio

The asset turnover ratio (Revenue ÷ Total Assets) measures how effectively a company generates sales from its asset base.

What does EBITDA stand for and why is it used?

Answer: Earnings Before Interest, Taxes, Depreciation, and Amortization — approximates operating cash flow

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is used to approximate operating cash generation, stripping out financing and accounting choices.

A company's gross profit margin has fallen from 45% to 32%. This most likely indicates:

Answer: Rising cost of goods sold or falling selling prices

A declining gross profit margin typically signals rising production costs, increased cost of goods sold, or pressure on selling prices eroding margin.

What is the purpose of horizontal analysis in financial statement analysis?

Answer: Comparing financial data across multiple periods to identify trends

Horizontal analysis compares financial data over multiple time periods, identifying trends, growth rates, and changes in absolute values.

Which ratio best measures a company's ability to meet its immediate short-term obligations without selling inventory?

Answer: Quick (acid-test) ratio

The quick ratio excludes inventory from current assets (Cash + Receivables ÷ Current Liabilities), providing a stricter liquidity measure than the current ratio.