FINANCE TEST PREPARATION GUIDE
PREPARATION INFORMATION:
Key Issue #1 – A company must be able to pay its bills, and hopefully have cash left
over for a rainy day.
Can we pay our Bills?
Quick Ratio: Cash + Marketable Securities + Receivables/Current Liabilities
Current Ratio: Current Assets/Current Liabilities
Current Assets are the assets above plus inventory on this test.
Do we have Cash available for investments/emergencies?
Available Cash:
Cash from Operations(CFO) + Current Assets – Current Liabilities
Key Issue #2 – Can the company survive for the next few years? This issue assesses
the company’s overall solvency.
Can we cover out immediate expenses?
CFO (Cash from Operations)/Current Liabilities
Can the Owners cover the company’s long-term debt?
Debt-to-equity ratio: Long-term debt/Owner’s Equity (Equity)
Can the company invest in new equipment and factories?
Cash from Operations to Capital Expenditures: CFO/CapEx
Key Issue #3 – Is the management team doing an effective job managing the
resources entrusted to it. This looks at the overall efficiency of the company.
Inventory Turnover: Cost of Goods Sold (COGS)/Inventory
Asset Turnover: Net Revenue/Total Assets
Asset Utilization: Operating Income/Total Assets
Employee Productivity: Total Revenue/Number of Employees
Overhead Operating Ratio: Operating Overhead (GSA Expense)/Operating
Income
Key Issue #4 – Is the company profitable? Will it remain so? Are the owners
receiving adequate compensation for risking their assets?
How effective is the management team?
Operating Profit Margin: Operating Income/Net Revenue
Return on Assets (ROA): Operating Income + Interest/Total Assets
Return on Equity (ROE): Operating Income/Owner’s Equity (Equity)
How much of the company assets belong to the owners and how much to debt
holders?
Financial Leverage: Total Assets/Owner’s Equity (Equity)
Key Issue #5 – A) How has past company actions affected financial performance
over time? i.e. – Are we doing better this year than last? Is our division doing better
than another company division? B) How will possible changes affect the company’s
financial position? i.e. – If we acquire another company will we be better off
financially or not? If we do “this,” will our financial position improve or not?
