🧩 Chapter 12: Fundamental Research — Case Study Questions
Q1. A company reports rising revenues but consistently declining CFO (Cash Flow from Operations). This most likely indicates:
A. Strong cash generation
B. Aggressive revenue recognition
C. Low sales growth
D. Healthy working capital cycle
Answer: B
✔ Earnings growing but cash not coming → accounting red flag.
Q2. A firm has ROE of 25% but Debt-to-Equity ratio of 3.0. This means:
A. High-quality returns
B. ROE boosted by excessive leverage
C. No financial risk
D. Strong moat
Answer: B
✔ Leverage artificially lifts ROE.
Q3. Company A and Company B have similar product lines.
Company A: P/E = 20, Growth = 10%
Company B: P/E = 15, Growth = 15%
Which appears undervalued?
A. Company A
B. Company B
C. Both equal
D. Cannot be assessed
Answer: B
✔ PEG(A) = 2, PEG(B) = 1 → B is cheaper relative to growth.
Q4. A company's current ratio rises sharply from 1.5 to 3.5. This may indicate:
A. Strong liquidity only
B. Excess inventory buildup
C. Strong margins
D. Good asset turnover
Answer: B
✔ High current ratio often caused by high inventory/receivables.
Q5. Company X reduces its debt every quarter while maintaining profit growth. What does this indicate?
A. Weak free cash flows
B. Strong internal cash generation
C. Poor capital allocation
D. Declining business
Answer: B
✔ Ability to reduce debt shows surplus cash after operations.
Q6. A sudden jump in receivable days suggests:
A. Customers paying early
B. Tightened credit policy
C. Aggressive sales booking
D. Low inventory
Answer: C
✔ Sudden jump = pushing sales without cash receipts.
Q7. A firm has stable operating margins but falling net profit margins. Reason?
A. Falling raw material cost
B. Rising interest or depreciation
C. Strong cost control
D. Increasing market share
Answer: B
✔ NPM falls when non-operating costs rise.
Q8. A company with negative FCF but high profit growth is likely:
A. Extremely efficient
B. Capital-intensive
C. Debt-free
D. Running out of cash
Answer: B
✔ Capex-heavy industries often have negative FCF despite profits.
Q9. If a company's interest coverage ratio falls from 6 to 1.8, it signals:
A. Improved financial flexibility
B. Strong profitability
C. Increasing financial risk
D. Higher pricing power
Answer: C
✔ Lower ICR = rising debt burden or falling profits.
Q10. Company Y consistently buys back shares even with high debt levels. This indicates:
A. Conservative management
B. Poor capital allocation
C. Strong liquidity only
D. Lowering leverage
Answer: B
✔ Buybacks with high debt = risky, shareholder-unfriendly decision.
Q11. A commodity company posts record profits due to a global price spike. Analyst should:
A. Value company using P/E
B. Assume profits will stay same forever
C. Use mid-cycle earnings for valuation
D. Use dividend yield only
Answer: C
✔ Commodity profitability is cyclical → mid-cycle earnings recommended.
Q12. Company Z has low ROCE compared to peers. Reason may be:
A. Very low capital employed
B. High working capital needs
C. Strong competitive moat
D. Low debt
Answer: B
✔ High capital blocked in inventory/receivables depresses ROCE.
Q13. A firm with consistently rising asset turnover likely has:
A. Deteriorating efficiency
B. Better use of fixed assets
C. Declining sales
D. Poor management
Answer: B
✔ Higher turnover = efficient asset use.
Q14. A company spends heavily on R&D with no short-term profit growth. This typically means:
A. Negative signal
B. Possible long-term value creation
C. Accounting irregularity
D. Governance issue
Answer: B
✔ Future moat-building expenditure.
Q15. A firm with improving margins, rising ROCE, and falling debt-to-equity is likely in which phase?
A. Turnaround phase
B. Decline phase
C. Stagnation
D. Early-stage losses
Answer: A
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