Horizonal Analysis & "Company Specific" Metrics

If a construction company's average labor cost per project suddenly spikes, what could be a reason?

• Increased labor wages

• Hiring more skilled workers

• Inefficiencies in job execution

• Any of the above

Answer explanation

The spike in average labor cost can be attributed to several factors: increased labor wages, hiring more skilled workers, or inefficiencies in job execution. Therefore, 'Any of the above' is the correct choice.

What metric might a mobile app company track to gauge revenue efficiency?

• Total number of downloads

• Average app sales per user

• Total customer base

• Number of employees

Answer explanation

The average app sales per user metric directly measures how much revenue each user generates, making it a key indicator of revenue efficiency. Other options do not provide insights into revenue generation per user.

Which company would most likely track the average revenue per sale?

• A construction firm

• A retail store

• A law firm

• A hospital

Answer explanation

A retail store tracks average revenue per sale to assess sales performance and optimize pricing strategies, making it the most likely choice. In contrast, construction firms, law firms, and hospitals focus on different metrics.

If a company's average revenue per sale drops significantly, what should they do?

• Ignore the change

• Investigate pricing and sales trends

• Increase advertising expenses without analysis

• Immediately raise prices

Answer explanation

Investigating pricing and sales trends is essential to understand the reasons behind the drop in average revenue per sale. This analysis can help identify issues and inform strategic decisions, unlike ignoring the change or raising prices without insight.

How do you calculate the Relative Change in financial analysis?

• Divide the absolute change by the original period's value

• Subtract last year's value from this year's value

• Divide total revenue by total expenses

• Multiply the absolute change by net profit

Answer explanation

To calculate the Relative Change, divide the absolute change (difference between this year and last year) by the original period's value. This method provides a percentage that reflects the change relative to the starting point.

Which calculation tells us the exact dollar difference between two financial periods?

• Gross Profit

• Absolute Change

• Operating Margin

• EBITDA

Answer explanation

The Absolute Change calculation provides the exact dollar difference between two financial periods, making it the correct choice. Other options like Gross Profit and EBITDA measure profitability, not direct changes in dollar amounts.

What does a Relative Change represent?

• The dollar amount difference between two periods

• The percentage change of a financial item between periods

• The total amount of revenue for a given year

• The company's overall profitability

Answer explanation

Relative Change measures the percentage change of a financial item between periods, indicating how much the item has increased or decreased relative to its previous value.

What might it indicate if revenue has increased, but net profit remains the same?

• The company has reduced expenses

• The company is experiencing higher costs

• The company is becoming more efficient

• The company is avoiding taxes

Answer explanation

If revenue has increased but net profit remains the same, it likely indicates that the company is experiencing higher costs, which offset the revenue gains. This suggests that expenses have risen, preventing profit growth.

What is the primary purpose of the Balance Sheet?

• To show the profitability of a company

• To show cash inflows and outflows

• To show assets, liabilities, and company worth

• To compare financial performance with competitors

Answer explanation

The primary purpose of the Balance Sheet is to show assets, liabilities, and company worth at a specific point in time, providing a snapshot of financial health, unlike profitability or cash flow statements.

What could a high customer acquisition cost indicate?

• Inefficient marketing strategies

• Increasing profitability

• Lower product costs

• Higher sales volume

Answer explanation

A high customer acquisition cost typically indicates inefficient marketing strategies, as it suggests that the company is spending too much to attract new customers compared to the revenue generated from them.