The food industry has been growing steadily. Company X’s liquidity ratios and external liquidity ratios are below industry averages. The company’s sales variability ratio is also well below that of the industry. which of the following is most likely to lead to earnings growth for the next year? A increasing operating margins B high return on equity C low payout ratio D high sustainable group rate Can you please provide explaination as well?
C Easier to manipulate by management assuming mature industry. Under same assumption, A and B would fall off.
hard to say i’m going to guess ‘ROE’ because you can over-leverage yourself into a higher ROE, and it doesn’t look too far fetched for a company that’s already suffering liquidity problems (though I don’t know who will be willing to extend them credit)
I would say C.
I would say C. Low liquidity is not such a bad sign, it could be that the company is aggrresivelly managing liquidities since external liquidity ratios are also low (not much debt on this company). Sales variability is low, sales are stable compared with the peer group, it is growing steadily. Increasing operating margins is the result of increasing EBIT, which is the result of lowering COGS and SG&A. This company seems already to be good at this. Both ROE and retention rate are component of growth, but I think earnings pluggging back into such a presperous company would provide the greatest opportunities for growth. I don’t know what group rate could mean:))
Makes me feel better that i am not the only one… Answer given is A: With industry sales growing and company variability low, strong margins should add to earnings grown. Remember that the components of the earnings growth rate relate to potential and not actual growth rate.
cfaiscomplex Wrote: ------------------------------------------------------- > Makes me feel better that i am not the only > one… > > Answer given is A: With industry sales growing > and company variability low, strong margins should > add to earnings grown. Remember that the > components of the earnings growth rate relate to > potential and not actual growth rate. I dont agree…if you have strong margin but higher interest expenses and other costs you can also report a large loss for the year
well, they don’t have large interest expense, they have low external debt, way lower than the peer group
this is the explaination given…i dont understand it either…
map1 Wrote: ------------------------------------------------------- > well, they don’t have large interest expense, they > have low external debt, way lower than the peer > group 
so, go for sure, not for potential and estimations lower COGS and SG&A, guaranteed increase in operating margin
map1 Wrote: ------------------------------------------------------- > so, go for sure, not for potential and > estimations > lower COGS and SG&A, guaranteed increase in > operating margin Yep,thanks
The way I look at answer A is that it is the most primary step in the equation building to the growth rate. Higher operating will lead to better ROE and greater Net Income which subsequently leads to ability to retain more earnings which leads to a higher growth rate.
mcf Wrote: ------------------------------------------------------- > The way I look at answer A is that it is the most > primary step in the equation building to the > growth rate. > > Higher operating will lead to better ROE and > greater Net Income which subsequently leads to > ability to retain more earnings which leads to a > higher growth rate. true, but it gets confusing because i see the word growth and all i think is g = ROE * (1 - DPO)
This strikes me as one of those questions that is way too easy to overthink