Financial Analysis- Certification Exam
Elaboration *Q&A* (100% Correct)
2025/2026 |VERIFIED|
What is the main objective of financial analysis in a business context?
To assess the financial health and performance of a business to aid decision-making.
Explain the difference between horizo...
Financial Analysis- Certification Exam
Elaboration *Q&A* (100% Correct)
2025/2026 |VERIFIED|
What is the main objective of financial analysis in a business context?
To assess the financial health and performance of a business to aid decision-making.
Explain the difference between horizontal and vertical analysis.
Horizontal analysis compares financial data over multiple periods, while vertical analysis
compares individual line items to a base item within a single period.
What does a company's liquidity ratio measure?
It measures the company’s ability to meet short-term obligations using its most liquid assets.
What is the purpose of a balance sheet in financial analysis?
To provide a snapshot of a company’s financial position at a specific point in time, showing assets,
liabilities, and equity.
How does the current ratio differ from the quick ratio?
The current ratio includes all current assets, whereas the quick ratio excludes inventories and
prepaid expenses to measure liquidity more conservatively.
Define return on equity (ROE) and its significance in financial analysis.
ROE measures a company’s ability to generate profit from its shareholders' equity, indicating
financial performance and efficiency.
What is the formula for calculating the debt-to-equity ratio?
Debt-to-equity ratio = Total Debt / Total Shareholders’ Equity.
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, Why is cash flow analysis important in financial decision-making?
It helps to assess the company’s ability to generate cash and manage its cash position for
operational needs and investments.
What is the significance of gross profit margin in financial analysis?
It indicates the percentage of revenue that exceeds the cost of goods sold, highlighting the
efficiency of production and sales.
What is the primary use of the income statement in financial analysis?
It provides a detailed view of a company’s revenues, expenses, and profits or losses over a
specific period.
What does the price-to-earnings (P/E) ratio indicate?
It measures the market price of a company’s shares relative to its earnings per share, helping
investors assess whether the stock is overvalued or undervalued.
What is working capital, and why is it important in financial analysis?
Working capital is the difference between current assets and current liabilities, indicating a
company’s ability to meet short-term financial obligations.
How do you calculate the return on assets (ROA)?
ROA = Net Income / Total Assets.
What does a negative net profit margin indicate?
It suggests the company is not generating enough revenue to cover its costs, which may point to
inefficiency or profitability issues.
Explain the concept of financial leverage.
Financial leverage refers to using borrowed funds to increase the potential return on investment,
but it also increases financial risk.
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