Finance English practice: Unit 16 — Financial Ratios 2

Biz English

Apr 14, 2016

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Complete the sentences below. Use the key words if necessary.
- Profitability
  
  key words
  profitability ○ gross profit margin ○ Return on assets ○ Return on equity
  
  There are various ratios that allow investors to compare a company’s profit with its sales, its assets or its capital. Financial analysts usually include them in their reports on companies.
  
  The is a calculation of gross profit multiplied by difference between sales and cost of goods sold and divided by sales. It is the money a company has left after it pays for the cost of the goods or services it has sold. A company with a higher gross profit margin than competitors in its industry is more efficient, and should be able to make a profit in the future.
  
  is a calculation of net profit divided by total assets. It measures how efficiently the firm’s assets are being used to generate profits.
  
  (ROE) is calculation of net profit divided by shareholders’ equity. It shows how big a company’s profit is (after interest and tax) compared with the shareholders’ equity or funds.
  
  Leverage
  
  key words
  Gearing ○ leverage ○ highly geared ○ highly leveraged ○ Interest cover ○ times interest earned
  
  or is calculation of debt divided by shareholders’ equity, often expressed as a percentage. It shows how far a company is funded by loans rather than its own capital. A or company is one that has a lot of debt compared to equity.
  
  or is calculation of EBIT divided by interest charges. It compares a business’s annual interest payments with its earnings before interest and tax, and shows how easily the company can pay long-term debt costs. A low interest cover shows that a business is having difficulties generating the cash necessary for its interest payments.
British English or American English?
- gearing
  - British English
  - American English
- leverage
  - British English
  - American English
Match the two parts of the sentences.
- After borrowing millions to finance the takeover of a rival firm, the company’s . . .
  interest cover is the lowest it has ever been.
  - gross profit margin rose 9% from a year ago, so senior management isn’t worried.
  - to acquire its rival, which would help to increase its steady growth.
  - how good a company is at making money.
  - interest cover is the lowest it has ever been.
- Although sales fell 5%, the company’s . . .
  gross profit margin rose 9% from a year ago, so senior management isn’t worried.
  - to acquire its rival, which would help to increase its steady growth.
  - gross profit margin rose 9% from a year ago, so senior management isn’t worried.
  - how good a company is at making money.
  - interest cover is the lowest it has ever been.
- Like profit growth, return on equity is a measure of . . .
  how good a company is at making money.
  - how good a company is at making money.
  - gross profit margin rose 9% from a year ago, so senior management isn’t worried.
  - interest cover is the lowest it has ever been.
  - to acquire its rival, which would help to increase its steady growth.
- With just 24% gearing, the company can afford . . .
  to acquire its rival, which would help to increase its steady growth.
  - to acquire its rival, which would help to increase its steady growth.
  - interest cover is the lowest it has ever been.
  - gross profit margin rose 9% from a year ago, so senior management isn’t worried.
  - how good a company is at making money.
Read the text and answer the questions below.
- Predicting insolvency: the Altman Z-Score
  
  The Z-Score was created by Edward Altman in the 1960s. It combines a set of 5 financial ratios and a weighting system to predict a company’s probability of failure using 8 variables from its financial statements.
  
  The ratios are multiplied by their weights, and the results are added together.
  
  The 5 financial ratios and their weight factors are:
  A — EBIT / Total Assets * 3.3
  B — Net Sales / Total Assets * 0.999
  C — Market Value of Equity / Total Liabilities * 0.6
  D — Working Capital / Total Assets *1.2
  E — Retained Earnings / Total Assets * 1.4
  
  Therefore the Z-Score = A * 3.3 + B * 0.99 + C * 0.6 + D * 1.2 + E * 1.4
  
  Interpreting the Z-Score:
  > 3 — based on these financial figures, the company is safe
  2.7 – 2.99 — insolvency is possible
  1.8 – 2.7 — there is a good chance of the company going bankrupt within 2 years
  < 1.8 — there is a very high probability of the company going bankrupt
- Which ration in the Z-Score takes into account:
  
  a) money used for everyday expenses?
  - D
  - E
  - A
  - B
  - C
- b) undistributed profits belonging to the shareholders?
  - A
  - C
  - E
  - B
  - D
- c) income or earnings before interest and tax are deducted?
  - C
  - D
  - A
  - E
  - B
- d) the current share price?
  - B
  - C
  - D
  - A
  - E
- e) the amount of money received from selling goods or services?
  - C
  - A
  - B
  - E
  - D

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