➢Comments of Ratios ‫التعليق على المؤشرات‬

This ratio measures the relationship between COGS and Sales, its measures the
➢Case Study - PACKMISR profitability, and recorded 80.33%, 77.46%. And 79.12% during understudy
COGS/Sales
period respectively,
➢Profitability Ratios this ratio is better in Y2009, due to controlling in the Direct Cost.
This ratio measures the relationship between Gross Profit and Sales, how much
Gross Profit bounds of sales generate how much bound of gross profit , and recorded
Margin 15.61%,17.96%,16.25% , and the better also in 2009, due to decreasing
COGS/Sales and enhancing the ratio in 2009.

This ratio measures the relationship between SG&A and Sales, how much bounds
SG&A / Sales of sales generate how much bound of SG&A, and recorded, and the better also in
2009, due to decreasing COGS/Sales and SG&A .

NOP Margin
NPBT Margin the better also in 2009 for the same reasons.
NPAT Margin

ROE
the better also in 2009 for the same reasons.
ROA

Sales decreased in 2009 but the company generated Good Profitability ratios,
Sales Growth despite 2010, which the sales increased but the profitability ratio is decreased
due to increasing in Financial Payments and Taxes charges .

Lecture #6 05-11-2021
Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 1
 ‫‪The ratio increased from 2008 to 2009 due to increasing WI due to increasing in‬‬
‫بسبب االزمة االقتصادية العالمية ‪A/R and Inventory, and decreasing in Sales‬‬
‫‪➢Efficiency Ratios‬‬ ‫‪1st Topic‬‬
‫‪In 2010 the ratio decreased from 32% and 24% due to increasing in sales and‬‬
‫‪decreasing in Trading Assets‬‬
‫‪WI / Sales‬‬ ‫وده معناه ان االزمة خلصت ‪ ،‬والدورة رجعت زي زمان‬
‫الن ارتفع نتيجة االزمة وعدم القدرة على البيع ‪WI in 2009 is fake‬‬
‫والزم تدخل بتعمق علشان تعرف انها عليت ليه وا انخفضت ليه وده شيء جيد وال أل ‪ ،‬فمش هتقدر تقول ان‬
‫االرتفاع او االنخفاض دا شيء جيد غير لما تعرف األسباب بعمق ‪.‬‬
‫‪2nd Topic‬‬ ‫وده معناه ان الشركة تعرضت الزمة ‪We note that the higher DOH in 2009, and this is fake‬‬
‫‪➔ A/R DOH‬‬ ‫اقتصادية طاحنة والفجوة التمويلية زادت زيادة وهمية لعدم القدرة على التحصيل من العمالء ‪ ،‬وأيضا عدم‬
‫‪➔ Inv. DOH‬‬ ‫القدرة على تصريف المخزون وبيعه‪.‬‬

‫‪➔ A/P DOH‬‬ ‫الن اشركة استغلت االزمة في انها تزود تسهيالت السداد للموردين ‪Increased in 2009,‬‬

‫= ‪➔ ACC‬‬
‫‪Operating Cycle‬‬ ‫اعلى ما يمكن في عام االزمة ‪ ،‬ولنفس األسباب اللي قلناها قبل كدة ‪ ،‬وطبعا هي زيادة وهمية‬
‫‪➔ CCC‬‬
‫‪1- measures the relationship between Gross PP&E and Sales.‬‬
‫‪3rd Topic‬‬
‫‪2- measures the relationship between net PP&E and Sales.‬‬
‫‪1- Gross Plant TO‬‬
‫‪3- measures the relationship between total Assets and Sales‬‬
‫‪2- net Plant TO‬‬
‫والمؤشرات دي عالية في ‪ ، 2008‬الحقيقة النها نتيجة انخفاض المبيعات ( المقام يعني )‬
‫‪3- Total Assets‬‬
‫وبرضه على الرغم من المبيعات في ‪ 2010‬زادت ‪ ، %18‬ولكن المؤشرات لما تتحسن وده الن كان فيه‬
‫‪TO‬‬
‫مشروعات تحت التنفيذ وما دخلتش الخدمة واإلنتاج والشركة ما لحقتش تستخدمها‪.‬‬
‫‪4th Topic‬‬
‫‪1- Plant life.‬‬
‫وده اللي خلى ‪The better ratios in 2010 due to expansions and purchasing new capex‬‬
‫‪2-Plant Age‬‬
‫المؤشرات دي ارتفعت‪.‬‬
‫‪3- Plant Life‬‬
‫‪remaining‬‬
‫‪Instructor/ Dr. Mohamed Samir‬‬ ‫‪Prepared by : Ahmed Salem‬‬ ‫‪2‬‬
➢Liquidity Ratios

Current Ratio All ratios are Misleading due to increasing in A/R and Inventory ‫نتيجة االزمة االقتصادية وعدم القدرة على التحصيل وعدم القدرة على التصرف في‬
Quick Ratio ‫المخزون‬

Cash Ratio Increased in 2009 due to Purchasing Marketable Securities ‫علشان تهرب من النشاط بتاعها وبدأت تتجه لشراء اذون خزانة مضمونة من الدولة‬

Defensive Interval Increased as a fake ratio due to fake increasing in A/R and Inventory.

Net WC +++high Positive due to increasing A/R and Inv. ( but we can’t determine that is enough to absorb the shrinkage or not )

It’s high in 2009 due to the Profit is High, and the ability of the Co. to serve FP about 120 time in 2009, and about 10 times in
Interest Coverage
2010 due to increasing FP due to new Debts, moreover the Profitability ratios in 2010 is less than Profitability ratios in 2009

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 3

➢Solvency Ratios

Total Liabilities / Net Worth

The high ratio in 2010 due to granting new Loans from banks.
‫الرافعة المالية‬

Gearing Ratio ( ‫الرافعة المصرفية‬

The high ratio in 2010 due to granting new Loans from banks.
) ‫ حقوق الملكية‬/ ‫كل الديون المصرفية‬

Total Debt / Total Assets The high ratio in 2010 due to granting new Loans from banks.

the ratio decreased in 2010 from 89% to 81% due to the company depended on Liability more than Equity and it’s high
Net Worth / Total Assets
risky but high return.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 4

‫‪➢Valuation Ratios‬‬

‫‪Dividends Payout‬‬ ‫وده بسبب االزمة االقتصادية ‪The less % in 2009 which represented 42% ،‬‬
‫‪Retained Rate‬‬ ‫و ده اللي خلى نسبة األرباح المحتجزة ولم توزع عاليه ووصلت لـ ‪%58‬‬

‫الشركة كبرت اوي في عام االزمة ‪ ، 2009‬والسبب حاجتين‪-:‬‬

‫‪Sustainable Growth Rate‬‬ ‫أوال ‪ -:‬حجزت أرباح كتير‬
‫ثانيا ‪ -:‬مؤشرات الربحية عالية جدا في ‪ _ 2009‬حققت أرباح كتير )‬

‫)‪Earnings Per Share (EPS‬‬ ‫مع ثبات عدد األسهم المصدرة ‪the high in 2009, due to generate a high Profit‬‬

‫الن االزمة االقتصادية خلت البورصة وسعر السهم يقع ‪It’s decreased in 2009‬‬
‫)‪Price Earning ratio ( P/E‬‬
‫فلما تيجي تقارن سعر السهم بالبورصة بربحيته تالقيها ضعيفة‪،‬‬

‫‪Dividends Yield‬‬ ‫النخفاص توزيعات األرباح مقارنة بالسعر ‪It’s decreased in 2009,‬‬

‫‪Instructor/ Dr. Mohamed Samir‬‬ ‫‪Prepared by : Ahmed Salem‬‬ ‫‪5‬‬

‫‪➢Dupont Ratios‬‬
‫‪ Du Bond Analysis‬لكي يتم اإلجابة على ‪ 3‬أسئلة‬

‫ما العوامل التي تتحكم في ربحية المساهمين ‪ /‬المالك ‪ ،‬بالزيادة او االنخفاض ؟ ‪ROE‬‬ ‫)‪(1‬‬
‫ما العوامل التي تتحكم في ربحية األصول بالزيادة او االنخفاض ؟ ‪ROA‬‬ ‫)‪(2‬‬
‫ما العوامل التي تتحكم في ربحية المبيعات بالزيادة او االنخفاض ؟ ‪ROS‬‬ ‫)‪(3‬‬

‫‪Assets Turn Over‬‬

‫العوامل التي تؤثر على ‪ ( ROE‬ربحية المالك ) ؟‬

‫)‪ ..... ROA (1‬ربحية األصول‬

‫)‪ ...... ALEV (2‬رافعة األصول‬

‫في الــ ‪ ROE‬بيتحرك بتحرك ‪ ROA & ALEV‬إيجابا او سلبا‬

‫وفي هذه الحالة نجد ان ربحية األصول هي التي تتحكم في ربحية المساهمين حيث انها ارتفعت في ‪ 2009‬لتسجل ‪ %10‬وبالتالي ‪ ROE‬ارتفع في عام ‪ 2009‬وعندما انخفض ‪ ROA‬في عام ‪ ، 2010‬انخفض ‪ ROE‬أيضا في ‪.2010‬‬

‫العوامل التي تؤثر على ‪ ( ROA‬ربحية األصول ) ؟‬

‫)‪ ..... ROS (1‬ربحية المبيعات ( العائد على المبيعات )‬

‫)‪ ...... ATO (2‬معدل دوران األصول‬

‫في الــ ‪ ROE‬بيتحرك بتحرك ‪ ATO & ROS‬إيجابا او سلبا‬

‫وفي هذه الحالة نجد ان ربحية المبيعات هي التي تتحكم في ربحية االصول حيث انها ارتفعت في ‪ 2009‬وبالتالي ‪ ROA‬ارتفع في عام ‪ 2009‬وعندما انخفض ‪ ROS‬في عام ‪ ، 2010‬انخفض ‪ ROA‬أيضا في ‪.2010‬‬

‫‪Instructor/ Dr. Mohamed Samir‬‬ ‫‪Prepared by : Ahmed Salem‬‬ ‫‪6‬‬

 ‫قواعد الـ ‪Spreading‬‬

‫‪ -1‬تقريب الميزانية و قائمة الدخل ألقرب ألف‪.‬‬

‫‪ -2‬تجاهل األرقام المستنتجة والعناوين ‪ ،‬حيث ان األرقام المستنتجة من رأي المراجع قد تختلف عن رأي المحلل‪.‬‬
‫( المراجع يقوم بتبويبه في المخزون )‬ ‫‪ -3‬مخزون قطع الغيار ‪ :‬يتم تبويبه مع األصول الثابتة اال اذا كانت الشركة تتاجر في قطع الغيار‬
‫خمزون قطع الغيار ‪ ،‬يتم تبويبه كاالتي ‪/‬‬
‫‪ -1‬خمزون ‪ -:‬لو الشركة تتاجر يف قطع الغيار وتقوم ببيعها‪.‬‬
‫‪ -2‬أصول متداولة أخرى ‪ -:‬الشركة ال تتاجر يف القطع ولكنها مدرجة ضمن خطوط اإلنتاج وعمرها اقل من سنة ‪.‬‬
‫‪ -3‬أصول طويلة األجل ‪ -:‬اذا كانت ضمن خطوط اإلنتاج وتعيش اكثر من سنة ‪.‬‬

‫و كلما اجتهنا يف التبويب لألصول املتداولة – املخزون – مؤشرات الشركة تتحسن نتيجة حتسن رأس املال العامل ببنوده ( السيولة – ‪ ، ) Tenor Miss matching – WI - WC‬والعكس صحيح يف حالة اجتاه التبويب لألصول طويلة‬
‫األجل‪.‬‬

‫‪ -4‬المستحق من شركات شقيقة ‪ -:Due from Affiliates‬ليا فلوس عند الشركات الشقيقة ‪ ،‬فما هي احتماالت التبويب‬
‫‪ ،Due From Affiliates‬يتم تبويبه كاالتي ‪/‬‬
‫‪ -1‬عمالء ‪ -: A/R‬لو فيه معامالت جتارية بينهم ‪ ،‬الن الشركة بتاعيت بتبيع بضاعة للشركة الشقيقة‪.‬‬
‫‪ -2‬أصول متداولة أخرى ‪ -:‬لو ليا فلوس عند الشركة شقيقة والفلوس دي بتقل من سنة للتانية النه بيديين اإلحياء انه قصري االجل ‪،‬‬
‫‪ -3‬أصول طويلة األجل ‪ -:‬لو ليا فلوس عند الشركة شقيقة والفلوس دي بتزيد من سنة للتانية النه بيديين اإلحياء انه طويل االجل ‪،‬‬

‫و كلما اجتهنا يف التبويب لألصول املتداولة – العمالء – مؤشرات الشركة تتحسن نتيجة حتسن رأس املال العامل ببنوده ( السيولة – ‪ ، ) Tenor Miss matching – WI - WC‬والعكس صحيح يف حالة اجتاه التبويب لألصول طويلة‬
‫األجل‪.‬‬

‫‪Instructor/ Dr. Mohamed Samir‬‬ ‫‪Prepared by : Ahmed Salem‬‬ ‫‪7‬‬

 ‫(التزام)‬ ‫‪ -5‬المستحق للشركات الشقيقة ‪ -:Due to Affiliates‬عليا فلوس للشركات الشقيقة ‪ ،‬فما هي احتماالت التبويب‬
‫‪6‬‬ ‫‪5‬‬ ‫‪4‬‬ ‫‪3‬‬ ‫‪2‬‬ ‫‪1‬‬
‫‪Netting Between‬‬
‫‪Due From & Due To‬‬ ‫‪Gray Area‬‬ ‫‪Long Term Liability‬‬ ‫‪Sundry Current‬‬
‫الشركة دي تسلف دي ‪700‬‬ ‫‪Equity‬‬ ‫المنطقة الرمادية‬ ‫التزامات غير متداولة‬ ‫خصوم متداولة ‪Liability‬‬ ‫‪A/P‬‬
‫مليون ‪ ،‬والشركة دي تسلف‬ ‫مستلف من الشركة الشقيقة بس‬ ‫لو العالقة بيني وبين الشركة‬
‫الشركة التانية دي خالص ‪700‬‬
‫مستلف من الشركة الشقيقة بدون‬
‫بفائدة ضئيلة جدا ‪ ،‬ونفس الكالم‬
‫لو العالقة بين شركتي والشركة‬ ‫أخرى‬ ‫الشقيقة انها تورد لشركتي بضاعة‬
‫فائدة ( قرض حسن ) ومدة‬ ‫الشقيقة في ان ده التزام طويل‬ ‫لو العالقة بين شركتي والشركة‬
‫مليون‬ ‫دول مش مالك‬ ‫‪...................‬‬
‫السداد طويلة‬ ‫االجل والرقم بيزيد من عام ألخر‬ ‫الشقيقة في ان ده التزام قصير‬
‫علشان تكبر األصول وااللتزامات‬ ‫‪.............‬‬ ‫وده تمويل تلقائي طبعا‬
‫((( فنعمل مقاصة بين البندين‬ ‫العالقة هنا مش محددة‬ ‫االجل والرقم بيقل من عام ألخر‬
‫ونحط الفرق )))‬

‫‪ - 6‬ال بد من معرفة نوع تقرير مراقب الحسابات‬

‫‪ Un Qualified Report‬نظيف‬ ‫‪-‬‬
‫‪ Qualified‬متحفظ وال بد من دراسة التحفظ ومدى تأثيره على نتائج التحليل‬ ‫‪-‬‬
‫عكسي ‪ " Adverse Opinion‬المراجع بيقول ان كل القوائم المالية دي ال تعبر عن أي حاجة صح "‬ ‫‪-‬‬
‫امتناع عن ابداء الرأي – ‪ Disclaimer Opinion‬المراجع مش قادر يقول رأي إيجابي او سلبي ‪ ،‬وبالتالي ما ينفعش المحلل يشتغل عليه‪.‬‬ ‫‪-‬‬
‫مصادر األموال‬ ‫استخدامات األموال‬
‫أصول تجارية‬ ‫‪ - 7‬ال بد من مراعاة بنود المنطقة الرمادية‪.‬‬
‫تمويل تلقائي‬
‫‪ - 8‬ال بد من معرفة تأثير التبويب على تجميل الميزانية او ظهورها بشكل سيئ‪.‬‬
‫سحب على المكشوف‬ ‫أصول قصيرة االجل‬ ‫‪ -‬كلما اتجهنا في التبويب ناحية األصول التجارية ‪ ‬الميزانية مؤشراتها ستكون ممتازة‪.‬‬
‫‪ -‬كلما اتجهنا في التبويب ناحية األصول طويلة األجل ‪ ‬الميزانية مؤشراتها ستكون وحشة ‪.Conservative‬‬
‫قروض طويلة‬
‫‪ -‬كلما اتجهنا في التبويب ناحية حقوق الملكية ‪ ‬الميزانية مؤشراتها ستكون ممتازة والمخاطر المالية هتقل‪.‬‬
‫منطقة رمادية‬ ‫‪ -‬كلما اتجهنا في التبويب ناحية التسهيالت والديون القصيرة (التمويل التلقائي) ‪ ‬الميزانية مؤشراتها‬
‫أصول طويلة االجل‬
‫ستكون وحشة‪.‬‬
‫حقوق ملكية‬

‫‪Instructor/ Dr. Mohamed Samir‬‬ ‫‪Prepared by : Ahmed Salem‬‬ ‫‪8‬‬

 ) ‫ سجل األصول الثابتة ( بنسميه برضه جدول االهالكات‬-9

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 9

Review Quiz:

1- In profitability analysis, when the CGS/Sales ratio is declining from period to period

a) The company is exhibiting sound control of costs ‫قادرة على التحكم في التكاليف‬
b) The company’s management of costs is spiraling out of control ‫الشركة لم تقدر على التحكم في التكاليف‬
c) The company is not properly managing the costs of supplies and raw materials ‫الشركة لم تستطع إدارة تكاليف المواد الخام‬
d) The company is focusing on costs of goods sold and not focused on other costs (sales, marketing and promotion) ‫الشركة ركزت على تكلفة البضاعة ولم تركز على‬
‫تكاليف البيع والتسويق‬
The CGS/Sales ratio shows the degree to which the company is managing costs related to supplies, raw material and other expenses tied directly to the asset-
conversation or operating cycle. When the ratio declines, the company is able to reduce operating costs or able to past cost increases to its customer base, in
order to improve gross operating profit margins.
A steady decline in the ratio implies the company consistently has control of cost management. It is not possible to determine solely from the CGS/Sales ratio
the level of costs related to sales, marketing and promotion

2- The company’s ROE

a) Will decrease if the company’s COGS/Sales ratio declines
b) Will increase if the company’s SGA/Sales ratio declines
c) Will increase if the company prefers long-term debt vs. short-term debt ‫ملهاش عالقة أصال بيها‬
d) Will increase if the company’s Revenues/Avg.-Assets ratio declines ‫دي لها عالقة بالكفاءة مش بالربحية‬
From the DuPont equation, ROE = ROS x ATO x ALEV.
If SGA/Sales declines, then ROS improves and so will ROE. ROE will decrease if CGS/Sales increases.
Revenues/Avg-Assets = ATO. If ATO declines, then ROE decreases.
In most cases, if the company prefers long-term debt vs. short-term debt, then long-term debt interest costs will be higher than short-term debt. (The higher interest costs will contribute to a
decline in ROE.)

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 10

3- A company’s Return on Equity (ROE)
a) Will increase if the company avoids debt and fund itself entirely from equity
b) Will increase if operating costs decline, relatively to trends in revenues ‫لما تنحفض التكاليف التشغيلية‬
c) Will decrease if it decides to take on more debt relative to equity ‫لو الشركة اخدت ديون من المالك‬
d) Will decline if the company’s asset-turnover (productivity) ratio is rising
From DuPont equation, ROE = ROS x ATO x ALEV
When operating costs decline relative to revenues, then that suggests CGS/Sales and SGA/Sales ratios are declining and ROS is improving, which has a favorable impact on ROE (as described in (b)).
When done prudently, when a company replaces equity with debt, then ROE can increase, not decrease.
If ATO is increasing, then ROE should increase, too, not decline.

4- As the NPAT/Sales ratio decreases, then the company

a) Is not managing operating costs and expenses as efficiently
b) Will still exhibit ample means to be able to manage debt obligations at any level
c) Will demonstrate sufficient liquidity on the balance sheet
d) Is indifferent to the amount of debt on the balance sheet

NPAT/Sales = ROS. If CGS/Sales and SGA/Sales decline, then ROS and NPAT/Sales will improve. NPAT/Sales, when it declines, the company is not managing costs as well as before or not managing
other expenses (e.g., taxes), as described in (a).
The company’s NPAT/Sales ratios can decline (profit margins declining), but still have substantial amount of liquidity (cash) on the balance sheet (as long as it is generating some profit).
If NPAT/Sales is declining and the company is becoming less profitable, it will likely be even more sensitive to its ongoing debt obligations

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 11

5- For analysts, EBITDA is useful as a metric because it measures:
a) The amount cash in reserves on the balance sheet
b) The amount of current liabilities on the balance sheet
c) The amount of cash available after allotments for capital expenditures
d) An approximation of operating cash flow before capital expenditures, debt service and tax obligation
EBITDA, by definition and convention, is a proxy for gross operating cash flow, although not a substitute for the actual derivation. EBITDA is unrelated to balance-sheet liabilities.
Ideally, the credit analyst wants to derive “cash available after CAPEX,” but EBITDA does not capture that and is not even an approximation for such

6- As the company improves performance and earnings grow, if the company pays out a steady proportion in dividends and buys back shares, what
happens to the level of equity capital? ‫ وبعدين تعمل إعادة شراء من المالك تاني‬، ‫لو الشركة بتوزع أرباح‬
a) Equity capital will grow at the same amount of earnings reported
b) The growth of equity capital will be restricted, or equity remain the same or even decline
c) The equity capital account remains the same no matter dividend-payout policy
d) Equity capital will grow at the same amount of increases on the balance sheet

By accounting standards, earnings will contribute to increases in equity capital. Dividends and buy-backs, depending on the company’s capital-management strategy and shareholder
expectations, will subtract from that.
Hence, a company’s earnings may grow substantially year to year, but because of dividends and buy-backs the equity on the balance sheet may not grow at the same rate and can possibly
remain the same or even decline.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 12

 7- An assessment of liquidity measures
a) The level of available cash and the ability to raise cash to pay down short-term obligations
b) The ability of a company to defer paying down debt obligations
c) The level of non-current assets on the balance sheet
d) The amount of short-term debt at statement date

By definition, liquidity measures cash, cash-equivalents, and assets that can be turned to cash quickly. Liquidity also measures the extent to which cash and cash-equivalents can offset all
short-term obligations (over 30-days or up to a year).
By some measure, liquidity is an indication, also, to be able to raise cash from committed funding arrangements to add to current cash balances (to be able to handle other current liabilities).
Liquidity is unrelated to non-current assets on the balance sheet (unless they will be sold for cash in a very short term). Liquidity cannot be measured solely based on the amount of short-term
debt.

8- “Working investment” (or “net working capital”) is measured as

a) (Cash + inventory) – (Payables + Accrued expenses)
b) (Inventory – Receivables) + (Payables – Expenses)
c) (Inventory + Accounts Receivable) – (Accrued Expenses + Accounts Payable)
d) (Accounts Receivable + Cash)/Short-term debt
Working investment (or sometimes called “net working capital”) is a credit-analysis term (defined in (c )) that permits special focus on the assets and liabilities important in the asset-conversion
cycle.
Cash is not included in that computation, and receivables are not subtracted from inventory. Working investment computations help determine short-term funding needs for the company.
(AR + Cash)/STD does not define working investment, although it can measure a degree of liquidity.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 13

 9- What statement best describes Debt/Ebitda? ‫مهمة‬
a) Debt/Ebitda estimates the minimum amount of time in years it will take to pay down all debt from operating cash flow?
b) Debt/Ebitda measures whether there is sufficient equity cushion on the balance sheet?
c) Debt/Ebitda measures the length of time in the asset-conversion cycle
d) Debt/Ebitda measures the amount of short-term debt on the balance sheet

Debt/Ebitda helps measure debt leverage on the balance sheet based on an approximation of how long it would take operating cash flow to pay down all debt, even if the company will likely
refinance some of the debt.
It refers to the minimum amount of time (as in (a)) because it presumes that all net operating cash will be used to service debt.
Equity is not factored in assessing levels of debt based on the ratio. The length of the asset-conversion cycle and short-term debt are not factored into Debt/Ebitda.

10- Decreases in “Inventory Days on Hand” imply

a) The company cannot afford to fund inventory purchases
b) The company has much more cash on hand
c) The company is selling off inventory more quickly and managing inventory levels efficiently
d) The company has rising tax obligations
Decreases in inventory days on hand imply company inventory is not held “on the shelf” or on the balance sheet for extended periods. Decreases imply the company is managing the asset-
conversion cycle quickly and efficiently (as described in (c )) and will, therefore, not require extra days of funding inventory on the balance sheet.
The metric has nothing to do with tax obligations and will not provide clues about how much actual cash appears on the balance sheet.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 14

11- Which ratio below defines the “Current Ratio”?
a) Working Capital/Sales
b) Cash/(Accrued expenses + Accounts Payable)
c) Current Assets/Current Liabilities
d) d) (Accounts Receivable)/Current Liabilities
The current ratio is formally defined (and depicted in answer (c )) by credit analysts by CA/CL and is often used a basic measure of liquidity. The AR/CL is one measure of liquidity, although not
a useful or widely used ratio. (There are better ratios.) Cash/(AE + AP) is not commonly referred to as the “Current Ratio,” although it can be used as a useful measure of liquidity.

12- Which ratio below best describes one version of the quick ratio?
a) Cash/Current Liabilities ‫دي اقرب حاجة ليها الن مفيش حاجة فيها مخزون مستبعد هنا‬
b) Current Liabilities/Working Capital
c) Cash/Tax-payables
d) Accounts receivable/Accounts payable
The quick ratio, defined by credit analysts and depicted in (a), focuses on the cash on hand and the degree it can pay down all current liabilities, if the company wanted or needed to.
Such quick ratios measure cash and cash-equivalents and all significant short-term obligations. Cash/Tax-Payables in (c ) measures the company’s ability to meet only tax obligations. Quick
ratios typically include a broad range of current liabilities.
AR/AP does not address ability to handle other current liabilities, which is what the quick ratio attempts to do

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 15

13- The permanent-growth impact on working investment implies the following:
a) Working investment may rise during certain periods because of seasonal growth in sales
b) As the company grows to new levels, working investment will rise to new permanent levels
c) Working investment will remain the same regardless of the season
d) Working investment will rise because of change in the company’s accounting for inventory

Permanent growth implies the recent growth in company operations and sales are not seasonal or temporary.
Permanent growth also implies the company will likely have permanent growth in levels of inventory and receivables, which implies working investment (a function of inventory and
receivables) will rise to new permanent levels.
Permanent growth and its impact on working investment will not be influenced by the accounting method for inventory

14- If the measure of “Payables Days on Hand” decreases, this may imply (Red Flag)
a) Suppliers and vendors are granting more lenient terms
b) Suppliers and vendors have concerns about the company’s financial soundness and, therefore, are becoming stricter with terms
c) Suppliers and vendors are not sure about the health of the company—whether it’s improving or deteriorating
d) Customers of the company are indifferent to the company’s condition
A decline in “Payables days on hand” implies the company is paying down suppliers and vendors more quickly.

In some cases, the company may have opted to make payments more quickly, but a decline in this metric may also suggest that the suppliers, concerned about the company’s condition, are
reducing credit terms (described in answer (b)).

Payables days on hand does not address or assess the perception of the company by its customer base

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 16

15- The concept of operating leverage measures ) ‫شرحناها في المحاضرة األولى ( تأثير التكاليف الثابتة على الربحية‬
a) The impact of fixed costs when revenues are in decline
b) The impact of cost accounting as businesses evolve
c) The efforts of companies to distinguish between expenses vs. expenditures
d) The impact of LIFO vs. FIFO inventory accounting
Operating leverage, by definition, measures the portion of fixed costs to total costs and is intended to measure the impact of the company not being able to reduce certain costs as it goes
through a downturn or is experiencing declines in revenues.
The metric is unrelated to accounting methods selected by the company or LIFO-FIFO accounting standards for inventory.
Operating leverage focuses on expenses (costs), with particular emphasis on fixed vs. variable. Expenditures are not expenses.

16. In periods of downturn ‫أوقات الكساد‬and a steady decline in revenues, a company with low fixed costs will be less vulnerable because
a) The company will be able to reduce quickly substantial variable costs
b) The company projects it will be able to negotiate away fixed costs
c) The company is confident it can sell the fixed assets related to fixed costs
d) The company expects variable costs to rise as revenues decline
Variable costs decline when revenues decline. So in a downturn, those costs can be reduced. A company with substantial fixed costs will be more vulnerable, as they
encounter costs that can’t be reduced.
In a downturn, the company may not be able to sell fixed assets related to fixed costs.
Variable costs, by definition, are costs the company won’t incur if product sales or business activity decreases.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 17

 17- Debt-service payments are the sum of the following:
a) Dividend payments + Equity buybacks
b) Non-cumulative preferred dividend payments + Interest payments
c) Interest payments on subordinated debt + Preferred dividend payments
d) Principal payments on debt + Interest payments on the same debt

Credit analysts measure total payments on debt instruments and debt exposures. That includes the sum of interest expenses on all debt and the required principal payments amortizing
debt outstanding (summarized in (d)). Debt instruments include loans and subordinated debt.
Debt-service payments are not applicable to non-debt instruments, including preferred stock and cash used to repurchase stock.

18- Which Debt/Net-operating-cash flow ratio below suggests the company is at risk of not being able to amortize debt as scheduled? balance sheet?
a) 0.7
b) 1.3
c) 12.4
d) 3.2
Debt/Net-operating-cash-flow measures approximately how long current cash flows (if sustained) will take to amortize all debt outstanding.
In many cases, the same debt may be refinanced. But credit analysts, for conservative scenarios, assume the company will not be able to refinance old debt.
The higher the ratio, the longer it takes for the company to pay down total debt. The longer it takes, then the more risk the company encounters. There is the risk the company will not be able
to sustain the same cash flows for an extended period.
A Debt/Net-op-cash-flow = 12.4 (in answer (c )) presumes it will take over 12 years to pay down existing debt and presumes the company will be able to maintain the same performance and
will not use cash flow to pay dividends or repurchase stock.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 18

19- A ratio of (EBITDA-CAPEX) / (Principal payments + Interest expense) > 1.2 over each of the past five years suggests
a) The company cannot pay down principal reliably from year to year
b) The company has minimal tax obligations
c) The company is able to meet debt obligations and make capital expenditures without difficulty
The company’s interest rate on debt outstanding is very low
The ratio addresses whether the company’s operating cash flows (measured by EBITDA) are sufficient enough to meet all Capital Expenditures, as well as make debt-service payments
without difficulty (as described in (c )).
When the ratio rises above 1.2, it implies the company can meet all such CapEx and debt requirements and still have a cushion of cash to use for other purposes (new investments,
dividends, taxes, cash reserves, etc.). It also proves the company is not barely meeting debt requirements from year to year.
The analyst should be concerned if the same ratio fell below 1.0 in every year the previous five years.

20- Which of the following does not represent off-balance-sheet risk?

a) Law suits and litigation with projected, but unlikely and unexpected settlements
Off – Balance Sheet
b) Goodwill that arises from acquisitions
c) Contractual commitments to purchase new technology systems ) ‫ ضريبي – مخصص معاشات – اعتمادات مستندية – خطابات ضمان ( االلتزامات العرضية‬/ ‫نزاع قضائي‬
d) Substantial deficits that exist in the company’s pension funds
Off-balance-sheet risks can be significant, especially if analysts ignore them or dismiss their relevance. Analysts, therefore, should be able to identify, recognize or find them in the process of
analysis and from financial-statement disclosures. It helps, too, to recognize what explicitly is an on-balance-sheet item vs. an off-balance-sheet risk.

In the above, based on current accounting standards, goodwill from acquisitions (in answer (b)) is a specific balance-sheet asset.

The “likely” or “expected” portion of a settlement in litigation should be recognized as a balance-sheet liability. Contractual commitments to purchase are not balance-sheet items, although after
the purchase, the system will appear on the balance sheet.

A company’s pension fund does not appear on the company’s consolidated balance sheet, although annual pension expenses and related payables appear in financial statements. The fund may
have deficits that must be addressed by the company. The company may increase pension-related expenses to address the deficit.

Instructor/ Dr. Mohamed Samir Prepared by : Ahmed Salem 19

21- A ratio of (EBITDA-Cap Ex)/(Principal payments + Interest expense + Lease payments + Preferred Dividends) < 1.0 in each of the past five years
suggests
a) The company has little difficulty in making payments of fixed charges
b) Net operating cash flow is growing at a rate of at least 10% annually
c) The company’s operating cash flows cannot handle annual fixed charges related to funding
d) The company’s capital expenditures are declining from period to period
The sum of debt-service payments, lease payments and preferred dividends represents “fixed charges”—payments that must be made every year at approximate fixed amounts. The ratio
attempts to address whether the company’s operating cash flows (measured by EBITDA – CapEx) can meet such payments.
If the ratio falls below 1.0 for five consecutive years, then the company is experiencing significant difficulty in operations and must seek secondary sources to resolve the cash-flow deficit
(new-debt proceeds, new equity proceeds, cash reserves, sale of fixed assets, etc.).
The ratio alone does not examine whether cash flows are growing at a specific rate. The ratio alone also does not show whether CapEx from year to year is increasing or decreasing.

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