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Financial Management > 4 - Analysis of Financial Statements > Flashcards

4 - Analysis of Financial Statements Flashcards

1
Q

Help us evaluate financial statements; used to make comparisons

A

Ratios

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2
Q

5 Categories of Ratios:

A
  1. Liquidity
  2. Asset Management
  3. Debt Management
  4. Profitability
  5. Market Value
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3
Q

Give an idea of firm’s ability to pay off debts that mature within a year

A

Liquidity ratios

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4
Q

How efficiently the firm is using its assets

A

Asset management ratios

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5
Q

How the firm has financed its assets as well as the firm’s ability to repay its long-term debt

A

Debt management ratios

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6
Q

How profitably the firm is operating and utilizing its assets

A

Profitability ratios

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7
Q

What investors think about the firm and its future prospects

A

Market value ratios

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8
Q

Shows how many times the particular asset is “turned over” during the year

A

Inventory Turnover Ratio

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9
Q

Term originated with old Yankee peddler; what he actually sold

A

Turnover

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10
Q

Represents the average length of time the firm must wait after making a sale before receiving cash

A

Days Sales Outstanding (DSO) Ratio

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11
Q

Days Sales Outstanding (DSO) Ratio is also called

A

Average Collection Period (ACP)

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12
Q

Measures how effectively the firm uses its plant and equipment

A

Fixed Assets Turnover Ratio

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13
Q

Measures how effectively the firm uses its total assets

A

Total Assets Turnover Ratio

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14
Q

Firms with relatively high debt ratios typically have higher expected returns when economy is normal, if in times with lower returns, it could possibly face

A

bankruptcy

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15
Q

2 Procedures Analysists Use to Examine Firm’s Debt:

A
  1. Check BS to determine portion of total funds represented by debt
  2. Review the IS to see the extent to which interest is covered by operating profits
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16
Q

Measures the percentage of the firm’s capital provided by debtholders

A

Total Debt to Total Capital

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17
Q

Generally refer to the total debt to total capital ratio

A

Company’s debt ratio

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18
Q

Measure of the firm’s ability to meet its annual interest payments

A

Times-Interest-Earned (TIE) Ratio

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19
Q

Group of ratios that show the combined effects of liquidity, asset management, and debt on operating results

A

Profitability Ratios

20
Q

Measures operating income (EBIT) per dollar of sales

A

Operating Margin

21
Q

Measures net income per dollar or sales

A

Profit Margin/Net Profit Margin

22
Q

Interest changes pull down

A

net income

23
Q

Measures the rate of return on the firm’s assets

A

Return on Total Assets (ROA)

24
Q

Measures the rate of return on common stockholder’s investment

A

Return on Common Equity (ROE)

25
Q

Measures the total return that the company has provided for its investors

A

Return on Invested Capital (ROIC)

26
Q

Indicates the ability of the firm’s assets to generate operating income

A

Basic Earning Power (BEP) Ratio

27
Q

Single best accounting measure of performance

A

Return on Common Equity (ROE)

28
Q

Related the firm’s stock price to its earnings and book value per share

A

Market Value Ratios

29
Q

Market Value Ratios are used in 3 primary ways:

A
  1. by investors
  2. by investment bankers
  3. by firms
30
Q

Shows how much investors are willing to pay per dollar of reported profits

A

Price/Earnings (P/E) Ratio

31
Q

Ratio of a stock’s market price to its book value

A

Market/Book (M/B) Ratio

32
Q

Looks at the relative market value of all the company’s key financial claims; not heavily influenced by the company’s debt and tax situations

A

Enterprise Value/EBITDA (EV/EBITDA) Ratio

33
Q

Shows the relationships among asset management, debt management, and profitability ratios

A

DuPont Equation

34
Q

Develop by the chemical giant’s financial staff in 1920s

A

DuPont Equation

35
Q

“Multiplier” that tells us how many times the profit margin is earned each year

A

Total assets turnover

36
Q

Adjustment factor

A

Equity multiplier

37
Q

Help identify ways to improve its performance

A

DuPont Equation

38
Q

Study various expense items and work with engineers, purchasing agents, and other operating personnel, to seek ways to cut costs.

A

Cost accountants

39
Q

Investigate ways to speed up collections, which would reduce accounts receivable and improve the quality of the total assets turnover ratio

A

Credit manager

40
Q

Analyze the effects of alternative debt policies, showing how changes in leverage would affect both the expected ROE and the risk of bankruptcy

A

Financial staff

41
Q

3 Problems that are likely to arise if firm relies too heavily on ROE to measure performance:

A
  1. ROE does not consider risk
  2. Does not consider the amount of invested capital
  3. Focus on ROE can cause managers to turn down profitable projects
42
Q

Project’s ROE must be combined with its size and risk to determine its effect on shareholder value

A
  1. ROE
  2. Risk
  3. Capital invested
43
Q

Process of comparing a particular company with a subset of top competitors in its industry; makes it easy to see exactly where a company stands relative to the competition.

A

Benchmarking

44
Q

Companies used for the comparison

A

Benchmark companies

45
Q

Analysis of firm’s financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial condition

A

Trend Analysis

46
Q

Techniques employed by firms to make their financial statements look better than they really are

A

Window Dressing Techniques

47
Q

Ratio analysis is used by 3 main groups:

A
  1. managers
  2. credit analysts
  3. stock analysts

Financial Management (5 decks)

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