Accounting (Ratios Analysis) Flashcards
Cash Flow Proxy Metrics
EBIT and EBITDA
Credit Metrics
Leverage Ratio and Interest Coverage Ratio
Returns-Based Metrics
ROE, ROA, ROIC
Cash Conversion Metrics
How quickly it takes a company to collect receivables, sell inventory, or pay the amounts it owes to suppliers
Days Sales Outstanding, Days Inventory Outstanding, Days Payable Outstanding, and Cash Conversion Cycle
EBIT
Proxy for FCF because both metrics reflect some or all the impact of Capital Expenditures
EBIT directly deducts part of CapEx via D&A (as a part of Depreciation)
EBITDA
Proxy for CFO because ignores affects of CapEx and its after affects (D&A)
Gives you a company’s core recurring business CF from operations before the impact of capital strucutre and taxes
Leverage Ratio
Leverage Ratio = Debt / EBITDA
Tells you how much debt a company has relative to its ability to repay the debt
Higher numbers are riskier and lower numbers are less risky
Interest Coverage Ratio
Interest Coverage Ratio = EBITDA / Interest Expense
Tells you how easily the company could pay for its current interest expense on debt
Higher numbers are better because they indicate there is more of a buffer in the case the business suffers and profits fall
Return on Equity (ROE)
ROE = Net Income / Average Shareholder’s Equity
Measures how efficiently a company is using “capital” or assets to generate Income
Return on Assets (ROA)
ROA = Net Income / Average Total Assets
Measures how efficiently a company is using assets to generate income
Return on Invested Capital (ROIC)
ROIC = NOPAT / Average Invested Capital
NOPAT = EBIT * (1-T)
Reflects income available to all investors after taxes. Therefore, it must exclude Net Interest Expense and Preferred Dividends
Invested Capital = Equity + Debt + Preferred Stock + Other Investor Groups
Days Sales Outstanding (DSO)
DSO = (Accounts Receivable / Revenue) *Days in Year
Days Inventory Outstanding (DIO)
DIO = (Inventory / COGS) * Days in Year
Days Payable Outstanding (DPO)
DPO = (Accounts Payable / COGS) * Days in Year
Cash Conversion Cycle (CCC)
Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
DIO + DSO - DPO
CCC - Tells you how long it takes a company to convert its inventory and other short term, operational assets, such as AR, into CFs
Lower numbers are better because that means the company is selling its inventory and collecting cash from customers more quickly
