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Some examples from this set of practice questions
1.
What do you do when the question asks you to evaluate the performance of a particular entity?
Answer: • Consider ratios from all areas depending on the information supplied in the question. • Include specifically requested ratios based on the scenario. • Use the mark allocation as a guide to how many ratios are needed
2.
What do you when the question asks you to evaluate the non-financial performance of a particular entity?
Answer: Discuss four criteria: 1. Sustainability 2. Environmental 3. Social 4. Governance
3.
PROFITABILITY RATIOS
Answer: These ratios analyse: • the entity’s ability to generate income • to effectively control its expenses and • to generate an acceptable profit compared to the prior year, the industry, and its competitors.
4.
CAPITAL STRUCTURE AND SOLVENCY RATIOS
Answer: These ratios analyse: • the composition of an entity’s capital i.e. ordinary shares, interest-bearing debt, and hybrid capital. • An entity’s ability to meet its long-term expenses and expansion and growth.
5.
LIQUIDITY RATIOS
Answer: These ratios analyse: • The entity’s ability to pay its debts as and when they fall due.
6.
RETURN ON INVESTED CAPITAL RATIOS
Answer: These ratios analyse the entity’s ability to: • generate a return relative to an investment base (e.g., invested capital, equity or assets), and minimise non-essential payments.
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