4- Financial statement analysis Flashcards
What are the 3 main types of financial statement analysis?
- Horizontal analysis
- Vertical analysis
- Ratio analysis
Describe horizontal analysis
Comparison of a company’s results over time by calculating absolute and percentage change for each income statement and balance sheet item using previous year as benchmark
Describe vertical analysis
Compares company’s account balances within a period focusing on sales revenue for income statements and total assets for balance sheets
What is an accounting ratio?
An accounting ratio compares an amount in a financial statement with another related amount for the purpose of tracing the relationship between them in hope of drawing meaningful conclusions from the relationship
What are the 3 main reasons we use ratio analysis?
- Assess profitability
- Assess ability to pay its debts
- Assess long term survival
What are the 2 main reasons why profit ratios are important?
- Important for owners because dividend levels and share prices depend on them
- Important to those with a claim on the company because falling profits and incurrence of losses would not only erode its liquidity but also threaten its continuity
What are the 7 main profit ratios?
- Gross profit
- Operating profit/PBIT
- Profit before tax (PBT)
- Net profit/ROS
- Return on investment (ROI)
- Return on equity (ROE)
- Return on assets (ROA)
What do efficiency ratios analyse?
The performing efficiency of a business is gauged by calculating how hard it uses its available resources
What are the 6 main efficiency ratios?
- Collection days
- Payable days
- Inventory days
- Operating cycle (Days)
- Operating cycle (%)
- Asset turnover
What is liquidity?
Liquidity is entity’s ability to muster liquid resources e.g. cash, as and when needed
What are the 2 main needs for liquidity?
Exploit opportunities and meet bills as they’re due
What are the 2 traditional methods to check for liquidity?
- Check how many times the current assets cover current liabilities
- Check how long (in days) it would take to convert each current asset into cash
What are the 3 main liquidity ratios?
- Current ratio (times)
- Quick ratio (times)/acid test
- Defensive interval (days)
What do investment ratios tell us?
Investment ratios generally indicate the extent to which the business is undertaking capital expenditure to ensure its survival and stability, and its ability to sustain current revenue and generate future increased revenue
What are the 7 main investment ratios?
- Earnings per share (EPS)
- Dividends per share
- Dividend cover
- Dividend yield (%)
- Price/earnings ratio
- Capital expenditure to sales revenue (%)
- Capital expenditure to non-current assets (%)
