An analyst decomposes ROE and finds the following: net profit margin is stable, asset turnover has improved, and leverage is unchanged. Which component most likely explains an increase in ROE?
Explanation
DuPont links ROE to margin, efficiency, and leverage; with margin and leverage unchanged, efficiency gains (asset turnover) drive ROE up.
Other questions
Which phase of the financial analysis framework specifies the questions the analysis must answer and the timetable for completion?
A vertical common-size balance sheet expresses each balance sheet item as a percentage of which base?
If a firm's receivables turnover falls while days sales outstanding (DSO) rises, what is the most likely interpretation?
Which liquidity ratio measures how long (in days) a company can operate using only its liquid assets (cash, marketable securities, receivables) without additional cash inflows?
Which solvency ratio best indicates the number of years required to repay total debt from EBITDA (assuming steady EBITDA and debt)?
An analyst computes ROA as Net income divided by average total assets. Which adjustment to the numerator would produce a measure that more clearly reflects returns available to all capital providers (creditors plus equity holders)?
Which of the following statements about DuPont decomposition is correct?
Which category of ratios would best reveal a company's ability to meet interest payments from operating earnings?
An analyst wants to compare two firms in different countries where accounting rules differ and fiscal year ends differ. Which approach will most help comparability?
Which of the following is NOT a limitation of ratio analysis noted in the chapter?
Which activity ratio is most directly used to compute days of inventory on hand (DOH)?
An analyst sees that a company's net income has consistently exceeded cash provided by operations over several years. Which concern is most relevant?
Which graphical format is most useful to show composition of asset categories in a single period?
Which statement best describes the appropriate use of averages when computing ratios that pair income-statement flows with balance-sheet stocks?
Which industry-specific ratio would be most useful for an analyst valuing a hotel chain?
Which of the following best describes a sensible approach to assessing cash flow quality relative to reported earnings?
When assessing a company's inventory health, which two measures should an analyst examine together to detect potential obsolescence?
Which of these is a recommended way to reduce overconfidence bias when producing financial forecasts?
Porter’s five forces include all of the following EXCEPT:
If an analyst finds that a firm’s EBIT is volatile year-to-year while ROE is steady, which explanation is most consistent with integrated ratio analysis?
Which ratio would an analyst use to evaluate a bank’s core profitability from its lending business?
When translating a foreign-company's financial statements for ratio comparison, which exchange rate should generally be used to convert income statement items for an annual analysis?
Which of the following best characterizes the cash conversion cycle (CCC)?
Which of these is the primary benefit of using DuPont decomposition when analyzing ROE?
In activity ratio computation, why might an analyst annualize a quarterly inventory turnover?
What is a principal warning sign discussed in the chapter that should alert analysts to potential revenue recognition manipulation?
Which practice could artificially inflate cash provided by operating activities in the short term without improving operating performance?
Which method of depreciation will typically lead to the highest expense in the early years of an asset’s life, all else equal?
When assessing deferred tax assets, the chapter advises analysts to focus on which judgment by management?
Which of the following is a primary use of ratio analysis as described in the chapter?
An analyst observing a firm with a negative cash conversion cycle should most appropriately:
Which statistical technique, mentioned in the chapter, helps identify relationships between variables such as sales and GDP for forecasting?
Which measure is most useful in comparing efficiency of fixed-asset utilization across firms?
An analyst finds a company reports unusually large 'other operating items' variability each year. Which of the following should the analyst consider doing when forecasting operating results?
When building a pro forma cash flow statement from projected net income, which items must the analyst typically estimate or forecast separately?
Why do analysts commonly compute ROIC (return on invested capital) on an after-tax basis?
Which technique would best help quantify the range of plausible outcomes for a company's free cash flow forecast?
Which of these is NOT a recommended way to address confirmation bias in analyst research?
An analyst observes a company's ROA falls while its net profit margin rises. Which other ratio change would most likely explain the ROA decline?
Which of the following choices is the best reason to prefer a multi-year forecast (e.g., 5 years) versus only a one-year forecast?
If a company operates in countries with widely differing inflation, what must an analyst consider when forecasting revenue growth?
Which of the following is a sensible way to treat a large restructuring charge when forecasting future operating performance?
When comparing two peer companies, one reports under IFRS and the other under US GAAP, what should the analyst do before comparing inventory turnover ratios?
What is the primary reason analysts use weighted-average shares outstanding rather than ending shares when computing EPS for a fiscal year?
Which of the following statements about trailing twelve months (TTM) calculations is correct?
Why is EBITDA often shown in analyst models even though it is not a GAAP measure?
Which modeling approach is described by starting from an economy-level growth rate and reducing it by expected changes in market share to estimate company sales?
Which behavior-related remedy helps limit the illusion of control when building complex forecasting models?
When estimating terminal value in a DCF, the chapter recommends which of the following to avoid overstating value?