CBA Financial Analysis & Business Valuation — Questions and Answers
Question 1: Which financial statement best indicates a company's profitability over a period?
- Balance Sheet
- Statement of Retained Earnings
- Income Statement (Correct answer)
- Cash Flow Statement
Correct answer: Income Statement
The income statement shows revenues and expenses, helping assess whether a company made a profit or loss over a specific period.
Question 2: What does the current ratio measure in financial analysis?
- Profitability
- Liquidity (Correct answer)
- Leverage
- Inventory turnover
Correct answer: Liquidity
The current ratio assesses a company’s ability to meet short-term obligations using its current assets.
Question 3: Which valuation method uses projected future cash flows to estimate a company’s worth?
- Book Value Method
- Comparable Company Analysis
- Market Multiples
- Discounted Cash Flow (Correct answer)
Correct answer: Discounted Cash Flow
Discounted Cash Flow (DCF) analysis estimates business value by forecasting future cash flows and discounting them to present value.
Question 4: Why is EBITDA often used in business valuation?
- It includes all tax obligations
- It represents net income
- It excludes operational earnings
- It isolates core profitability (Correct answer)
Correct answer: It isolates core profitability
EBITDA reflects earnings before interest, taxes, depreciation, and amortization, providing a clearer picture of operational profitability.
Question 5: What does a high debt-to-equity ratio typically indicate?
- Strong equity backing
- Low financial risk
- High use of leverage (Correct answer)
- High cash reserves
Correct answer: High use of leverage
A high debt-to-equity ratio means a company is heavily financed by debt, which could increase financial risk.
Question 6: Why is trend analysis important in financial forecasting?
- It determines market size
- It evaluates employee performance
- It measures tax liabilities
- It identifies financial patterns (Correct answer)
Correct answer: It identifies financial patterns
Trend analysis helps identify consistent patterns over time, allowing better forecasting of future financial performance.
CBA Financial Analysis & Business Valuation
Which financial statement best indicates a company's profitability over a period?