Anlaysing Financial Statements Flashcards
Who reads financial statements?
Investors - predict expected returns (how successful the investment might be) and assess associated risk
Creditors - Liquidity and solvency - concern with downside
Define common size statement and their purpose
Common size statements simplify the comparison of different companies or one firm over time - allows for identifying big changes
On a common size income statement each item is expressed as a percentages of sales
In the balance sheet, the common size is total assets - express everything as a percentage of total assets
Explain trend analysis
Trend analysis compares financial statement changes over time and identifies predictable patterns that have occurred
Beware of numbers of a low base and sign changes as increases may be seen as bigger
Explain short term liquidity
12months can business pay its bills in short term do they have enough cash
Explain long term solvency
Long term solvency - are assets>liabilities - is the company solvent?
ROE ratio
Net income-pref divs / Average common stockholder equity
ROA
Earnings +interest(1-tax rate)/ average total assets
Return on invested capital
Net operating profit less adjusted taxes/Invested capital
Gross profit %
Gross profit (margin)/sales
Asset turnover
sale/average total assets
EBITDA/sales
EBITDA/Sales
Current ratio
Current assets/current liabilities
Quick ratio
Current assets-inventory-prepaid/current liabilities
Accounts receivable turnover
Credit sales/Average accounts receivable
Average collection period - days
365/accounts receivable turnover
