Financial/Ratio Analysis Practice Test
The information below is excerpted from the financial statements of two companies. Use this information to answer the questions 1-5.
|
(in $ million)
|
Company A
|
Company B
|
|
Net revenues
|
117958
|
41296
|
|
Net income
|
3526
|
1188
|
|
Total current assets
|
18672.5
|
29564.5
|
|
Total assets
|
42494
|
37433
|
|
Total current liabilities
|
12708.5
|
15370
|
|
Total liabilities
|
24671
|
32030
|
|
Total stockholders' equity
|
17823
|
5403.5
|
1. Which company is more efficient (i.e., utilizes its assets better)? Justify using appropriate ratio(s).
2. Which company is less liquid (i.e., more risky in the short-term)? Justify using appropriate ratio(s).
3. Which company is more leveraged? Justify using appropriate ratio(s).
4. Is one company significantly more profitable than the other? Justify using appropriate ratio(s).
5. Which company creates higher value for its shareholders? Explain using appropriate ratio(s). (Stockholder equity can be used as a proxy for shareholders)
6. Explain the difference between accounting (financial statements) and market value (stock price) measures of performance?
7. What are the steps to analyze financial statements strategically?
8. How can you control for size when comparing the financials of the 2 firms from the same industry?
10. What's a potential problem with using rule of thumb in interpreting financial ratios?