Unit study guide · NISM Series XV
Company Analysis – Financial Analysis
16 questions in this unit
What this unit covers
- Gamma Ltd. reports current assets of ₹540 crore and current liabilities of ₹270 crore. Its current ratio is:
- A company has a net profit margin of 9%, asset turnover of 1.4 times and an equity multiplier of 2.2 times. Using the three-step DuPont identity, its ROE is closest to:
- An analyst is valuing an operating business using an enterprise-value DCF and discounts cash flows at the weighted average cost of capital (WACC). Which cash-flow measure is conceptually consistent with that approach?
- A company reports three years of rising net profit, but cash flow from operations remains negative because trade receivables and contract assets are expanding much faster than revenue. Which is the most appropriate analytical response?
- Delta Ltd. has a market capitalisation of ₹2,100 crore, debt of ₹500 crore, cash of ₹200 crore and EBITDA of ₹300 crore. Assuming no other enterprise-value adjustments, its EV/EBITDA multiple is:
- A company’s receivable days rise from 42 to 96 over three years while revenue growth slows and cash flow from operations weakens. Which is the most appropriate conclusion for an analyst?
- A parent company owns a large operating subsidiary that contributes most of the group’s revenue and also carries significant debt. For analysing the economics of the overall group, which statements are generally more informative?
- A manufacturer reports annual cost of goods sold of ₹730 crore and average inventory of ₹100 crore. Its inventory turnover is approximately:
- An auditor issues a qualified opinion because sufficient evidence could not be obtained for a material class of inventory. What is the best response by a research analyst?
- A company reports revenue of ₹1,200 crore and cost of goods sold of ₹780 crore. Its gross profit margin is:
- A company has interest-bearing debt of ₹600 crore and shareholders' equity of ₹400 crore. Ignoring other definitions of debt for this question, its debt-to-equity ratio is:
- A company reports profit after tax of ₹180 crore. Depreciation, a non-cash expense, is ₹50 crore and net working capital increases by ₹70 crore. Ignoring all other adjustments, cash flow from operations is:
- A company earns ₹100 crore and has 50 crore shares outstanding, so EPS is ₹2.00. It then issues 10 crore additional shares, and assume profit remains ₹100 crore. What happens to EPS?
- Why should an analyst read the notes to accounts rather than rely only on the face of the financial statements?
- A company generates annual revenue of ₹900 crore on average total assets of ₹600 crore. Its asset turnover is:
- Company A reports a much higher net margin than peers, but its profit includes a large one-time gain from sale of land. For a meaningful operating peer comparison, an analyst should:
Key ideas
From the practice bank · 1
Gamma Ltd. reports current assets of ₹540 crore and current liabilities of ₹270 crore. Its current ratio is:
Current ratio = Current assets ÷ Current liabilities = 540 ÷ 270 = 2.0 times. Remember: Current ratio measures current assets relative to current liabilities.
Hint Common mistake: Reversing current assets and current liabilities.
XV-006From the practice bank · 2
A company has a net profit margin of 9%, asset turnover of 1.4 times and an equity multiplier of 2.2 times. Using the three-step DuPont identity, its ROE is closest to:
ROE = Net profit margin × Asset turnover × Equity multiplier = 9% × 1.4 × 2.2 = 27.72%, approximately 27.7%. Remember: DuPont decomposes ROE into profitability, asset efficiency and financial leverage.
Hint Common mistake: Multiplying only two of the three components.
XV-007From the practice bank · 3
An analyst is valuing an operating business using an enterprise-value DCF and discounts cash flows at the weighted average cost of capital (WACC). Which cash-flow measure is conceptually consistent with that approach?
FCFF is the cash flow available to all providers of capital and is therefore consistent with valuing the enterprise using WACC. FCFE is an equity cash flow and is normally paired with the cost of equity. Remember: Match the cash-flow definition to the discount rate and valuation level.
Hint Common mistake: Discounting FCFE at WACC or FCFF at the cost of equity.
XV-008From the practice bank · 4
A company reports three years of rising net profit, but cash flow from operations remains negative because trade receivables and contract assets are expanding much faster than revenue. Which is the most appropriate analytical response?
Persistent divergence between reported profit and operating cash flow can be an earnings-quality warning, particularly when receivables or contract assets grow unusually fast. It does not by itself prove manipulation or insolvency, but it warrants investigation. Remember: Profit growth should be cross-checked against cash conversion and working-capital behaviour.
Hint Common mistake: Treating a red flag as proof of fraud, or ignoring it entirely.
XV-009From the practice bank · 5
Delta Ltd. has a market capitalisation of ₹2,100 crore, debt of ₹500 crore, cash of ₹200 crore and EBITDA of ₹300 crore. Assuming no other enterprise-value adjustments, its EV/EBITDA multiple is:
Enterprise value = 2,100 + 500 − 200 = ₹2,400 crore. EV/EBITDA = 2,400 ÷ 300 = 8.0 times. Remember: Calculate enterprise value first. Then divide by EBITDA.
Hint Common mistake: Using market capitalisation instead of enterprise value in the numerator.
XV-010From the practice bank · 6
A company’s receivable days rise from 42 to 96 over three years while revenue growth slows and cash flow from operations weakens. Which is the most appropriate conclusion for an analyst?
A large increase in receivable days means cash is being collected more slowly relative to sales. When combined with slowing revenue growth and weaker operating cash flow, it is a meaningful warning sign. It does not prove aggressive accounting, but it warrants deeper analysis. Remember: Working-capital ratios should be read together with growth and cash-flow trends.
Hint Common mistake: Treating a red flag as either conclusive proof of manipulation or as irrelevant.
XV-058From the practice bank · 7
A parent company owns a large operating subsidiary that contributes most of the group’s revenue and also carries significant debt. For analysing the economics of the overall group, which statements are generally more informative?
Consolidated statements combine the parent and controlled subsidiaries subject to accounting rules and are generally more useful for understanding the economic position of the group. Standalone statements can still be important for legal-entity cash flows, dividends and obligations. Remember: Use consolidated accounts to understand the group, but do not ignore standalone constraints and cash flows.
Hint Common mistake: Using only whichever statement shows the stronger result.
XV-080From the practice bank · 8
A manufacturer reports annual cost of goods sold of ₹730 crore and average inventory of ₹100 crore. Its inventory turnover is approximately:
Inventory turnover = Cost of goods sold ÷ Average inventory = ₹730 crore ÷ ₹100 crore = 7.3 times. Remember: Efficiency ratios relate an income-statement flow over a period to an appropriate average balance-sheet stock.
Hint Common mistake: Using year-end inventory automatically when average inventory is explicitly provided.
XV-081From the practice bank · 9
An auditor issues a qualified opinion because sufficient evidence could not be obtained for a material class of inventory. What is the best response by a research analyst?
A qualified audit opinion is a significant input into accounting-quality analysis. The analyst should understand what is qualified, why, how material it may be and whether it affects earnings, assets, cash flows or confidence in controls. It is not automatically proof that the company is worthless. Remember: Audit opinions affect how much confidence an analyst should place in reported financial statements.
Hint Common mistake: Treating all audit qualifications as either harmless boilerplate or proof of fraud.
XV-082From the practice bank · 10
A company reports revenue of ₹1,200 crore and cost of goods sold of ₹780 crore. Its gross profit margin is:
Gross profit = ₹1,200 − ₹780 = ₹420 crore. Gross margin = ₹420 ÷ ₹1,200 = 35%. Remember: Gross margin measures gross profit as a percentage of revenue.
Hint Common mistake: Using cost of goods sold divided by revenue and calling it gross margin.
XV-112From the practice bank · 11
A company has interest-bearing debt of ₹600 crore and shareholders' equity of ₹400 crore. Ignoring other definitions of debt for this question, its debt-to-equity ratio is:
Debt-to-equity = Debt ÷ Equity = 600 ÷ 400 = 1.50 times. Remember: Always identify the numerator and denominator before computing a leverage ratio.
Hint Common mistake: Reversing equity and debt.
XV-113From the practice bank · 12
A company reports profit after tax of ₹180 crore. Depreciation, a non-cash expense, is ₹50 crore and net working capital increases by ₹70 crore. Ignoring all other adjustments, cash flow from operations is:
Starting from profit after tax, add back the non-cash depreciation and subtract the increase in working capital: 180 + 50 − 70 = ₹160 crore. Remember: An increase in working capital generally uses cash. Non-cash depreciation is added back in an indirect cash-flow bridge.
Hint Common mistake: Adding every accounting adjustment without considering whether it is a cash source or use.
XV-114From the practice bank · 13
A company earns ₹100 crore and has 50 crore shares outstanding, so EPS is ₹2.00. It then issues 10 crore additional shares, and assume profit remains ₹100 crore. What happens to EPS?
After the issue, shares outstanding become 60 crore. With unchanged profit, EPS = ₹100 crore ÷ 60 crore = approximately ₹1.67. Remember: Equity issuance can dilute per-share earnings if incremental profit does not offset the larger share count.
Hint Common mistake: Looking only at total profit and ignoring changes in shares outstanding.
XV-115From the practice bank · 14
Why should an analyst read the notes to accounts rather than rely only on the face of the financial statements?
Notes to accounts provide essential context such as accounting policies, segment details, related-party information, commitments, contingencies and breakdowns of financial-statement line items. Remember: Financial statements should be read together with their notes and disclosures.
Hint Common mistake: Treating headline financial statements as complete without reading the supporting notes.
XV-116From the practice bank · 15
A company generates annual revenue of ₹900 crore on average total assets of ₹600 crore. Its asset turnover is:
Asset turnover = Revenue ÷ Average total assets = 900 ÷ 600 = 1.50 times. Remember: Asset turnover measures how much revenue is generated per unit of assets.
Hint Common mistake: Reversing assets and revenue.
XV-117From the practice bank · 16
Company A reports a much higher net margin than peers, but its profit includes a large one-time gain from sale of land. For a meaningful operating peer comparison, an analyst should:
Peer analysis should adjust for material non-recurring items where appropriate so that operating economics are compared on a more like-for-like basis. Remember: Good peer comparison requires consistent definitions and adjustment for material non-recurring items.
Hint Common mistake: Comparing headline ratios without checking what drives them.
XV-118