Final Exam- Financial Analysis (CFA)
Question and Answers [100% Correct] 2025
|Updated Version|
What is the primary purpose of financial statement analysis?
The primary purpose is to evaluate a company’s financial performance and position to make
informed decisions on investments, creditworthiness, and overall company health.
How is the current ratio calculated, and what does it indicate?
The current ratio is calculated by dividing current assets by current liabilities. It measures a
company’s ability to cover its short-term obligations with its available short-term assets.
What is the difference between operating income and net income?
Operating income reflects a company’s core business profitability, excluding non-operating
income and expenses, while net income accounts for all revenues and expenses, including taxes and
interest.
How does the P/E ratio provide insights into a company’s market valuation?
The price-to-earnings (P/E) ratio compares the market price per share to earnings per share,
indicating investor expectations for future growth and the relative value of the company’s stock.
What does the DuPont analysis reveal about a company’s financial performance?
DuPont analysis breaks down return on equity (ROE) into profit margin, asset turnover, and
financial leverage, helping to identify the main drivers of a company’s performance and potential areas
for improvement.
How does a company’s capital structure impact its cost of capital and financial risk?
A company’s capital structure, consisting of debt and equity, directly affects its weighted average
cost of capital (WACC). More debt can lower WACC due to tax deductibility, but it increases financial risk
by amplifying the effect of earnings volatility.
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,What is EBITDA, and why is it a key metric in financial analysis?
EBITDA, or earnings before interest, taxes, depreciation, and amortization, measures a company’s
operational profitability by excluding non-cash and non-operating expenses, providing a clearer view of
ongoing business performance.
What role does working capital play in assessing a company’s operational efficiency?
Working capital, calculated by subtracting current liabilities from current assets, reflects a
company’s ability to finance its day-to-day operations and invest in future growth while managing short-
term obligations.
What does a company’s cash flow statement reveal about its financial health?
The cash flow statement outlines cash inflows and outflows from operating, investing, and
financing activities, providing insights into a company’s liquidity, solvency, and overall financial well-
being.
Why is free cash flow an essential measure of financial stability?
Free cash flow represents the cash available to shareholders after a company has covered its
capital expenditures. Positive free cash flow is vital for sustaining operations, paying dividends, and
funding growth initiatives.
What is the significance of the debt-to-equity ratio?
The debt-to-equity ratio measures a company’s financial leverage by comparing its total debt to
shareholders’ equity. A higher ratio implies greater risk, as more debt increases the likelihood of financial
distress during downturns.
How does the quick ratio provide a more conservative view of a company’s liquidity?
The quick ratio is similar to the current ratio but excludes inventory from current assets, giving a
stricter measure of a company’s ability to cover short-term liabilities with its most liquid assets.
What does the interest coverage ratio indicate about a company’s ability to manage debt?
The interest coverage ratio is calculated by dividing EBIT by interest expenses. A higher ratio
suggests the company has sufficient earnings to meet its interest obligations, reducing the risk of default.
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, How do changes in working capital impact a company’s cash flow?
Changes in working capital, such as increased receivables or inventory, can consume cash, while
reductions, such as quicker collections or lower inventory, free up cash and improve liquidity.
What is the significance of return on assets (ROA) in assessing company performance?
ROA indicates how efficiently a company uses its assets to generate profits. A higher ROA
suggests better management of assets, leading to stronger profitability.
What role does the gross profit margin play in understanding a company’s profitability?
The gross profit margin, calculated as gross profit divided by revenue, measures the percentage
of revenue that exceeds the direct cost of goods sold, indicating how efficiently a company produces its
goods or services.
Why is the cash conversion cycle a critical indicator of operational efficiency?
The cash conversion cycle measures how long it takes for a company to convert its investments in
inventory into cash flows from sales. A shorter cycle indicates quicker cash generation and more efficient
operations.
What is economic value added (EVA), and how does it measure a company’s financial performance?
EVA is a measure of a company’s true economic profit after deducting the cost of capital. Positive
EVA indicates the company is creating value beyond its cost of capital, whereas negative EVA suggests it
is destroying value.
How do foreign exchange rates impact a multinational company’s financials?
Fluctuations in foreign exchange rates affect the value of a company’s international revenue,
expenses, and profits, potentially creating currency translation risks and impacting financial results.
What is the purpose of the dividend payout ratio, and what does it reveal about a company’s financial
strategy?
The dividend payout ratio shows the percentage of earnings distributed as dividends. A high ratio
may suggest a mature company with fewer growth opportunities, while a lower ratio may indicate
reinvestment in future growth.
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