ARA ratios Flashcards
Horizontal Analysis
Compares reported amounts across different periods to identify change by SIGNIFICANCE and MAGNITUDE
Absolute change
(Reported amount in current period)-(Reported amount in previous period)
Relative change (%)
[(Reported amount in current period)-(Reported amount in previous period)]/Reported amount in previous period
Trend analysis
Uses time series data to analyse past performance as a means to predict future performance
Select a base year that is not ‘atypical’
Assign value of 100
Express all years in relative terms
ROE
Return to ordinary S.H
Higher=Better
[(Profit available to Ord. S.H)/(Avg of Ord. S.H’s Equity or Tot Equity)]*100
What causes ROE to increase
Increase in profit
- Increase in revenue
- Decrease in expense
Decrease in equity
- Share buybacks
- Dividends
ROA
Ability to use resources to produce returns
Higher=better
[(EBIT)/Avg Tot Assets]*100
What causes ROA to increase
Increase in EBIT
- Increase in revenue
- Decrease in expense (exclude interest and tax)
Decrease in Tot Assets
- Diposals
- Depreciation & Amortisation
- Impairment
Gross profit margin
Indicator of mark-up
rate at which sales generate revenue
(Gross Profit/Sales Revenue)*100
EBIT profit margin
Rate at which sales generate EBIT
(EBIT/Sales Revenue)*100
What causes profit margin to increase
Increase in Revenue
- Increase in selling Price
- Increase in vol of sales
- Elasticity of demand
Increase in Mark up
- Increase in selling price
- Decrease in cost of sales
Decrease in expenses
- Efficiency
Expense ratio
Rate at which sales revenue is absorbed by a specific expense
[(Selling & (insert line item SoP/L ) Expense)/Sales Revenue]*100
What can decrease Expense ratio
Increase in revenue
Cash Flow to Sales Ratio
Rate at which sales revenue generates operating CF
(Net Operating CF/Sales Revenue)*100
What causes CF to Sales ratio to increase
Increase in operating inflows
Decrease in operating outflows
Asset Turnover
Indicates effectiveness of entity’s assets to generate sales rev, how well an entity is managing its sales investment in current and non-current assets
Sales Rev/Avg Tot Assets=n time p.a
What causes ATO to increase
Increase in sales rev
Decrease in avg assets
What is the relationship between Profit Margin, ATO and ROA
PM *ATO=ROA
Increase in ROA=Increase in PM or ATO
PM and ATO are inversely related
Inventory Turnover/Days Inventory
Avg no. of days inventory is held
(Avg Inventory * 365)/Cost of Sales
What causes improvement in Inventory Turnover
Sell more
Sell quicker
Hold less
Days sales outstanding
A measure of asset efficiency; no. of day b/w sale and cash receipt
(Avg Trade Receivables *365)/Sales Revenue
What causes improvement in days sales outstanding
Reduced credit terms
Discounts on prompt payment
Improve screening/collection procedure
Days Purchases outstanding
Avg time to pay for inventory purchases
(Avg Trade Payable*365)/(Cost of Sales + Net increase in Inventory)
What causes changes in Days Purchases outstanding
Changes in CF
Changes in suppliers credit terms
Current Ratio/Working Capital Ratio
CA/CL (either as ratio or %)
What causes increase in current ratio
Increase in CA
- Cash injection
- Increase in inventory turnover
- Liquidate NCA
Decrease in CL
- Decrease in payables
- Defer loans to NC
Quick Ratio
Amount of quick assets to service CL
(Cash + Receivables)/(CL-Overdrafts) (either as ratio or %)
Removes:
- Inventory (takes longer to convert to cash)
- Prepayments (Future economic Benefit isn’t CF)
- Overdrafts (ongoing source of funding)
What causes increase in quick ratio
Increase in CA
Decrease in CL
CF ratio
Amount of OCF to service CL
(Net operating CF or CGO)/CL=n times
better than current ratio
Debt Ratio
Extent to which entity has used debt to finance its investment in assets
Tot L/Tot A (%)
What are alternatives to Debt Ratio
Equity Ratio=100%-Debt Ratio=Tot Eq/Tot A
Debt to Equity Ratio=Tot L/Tot Eq
What causes Debt Ratio to increase
Increase in borrowings
Decrease in Eq
Decrease in A
Interest Coverage Ratio/Times interest earned
Ability for entity to generate earning to cover finance costs
EBIT/Finance Costs=n times
What causes interest coverage ratio to increase
Increase in EBIT
Decrease in interest expense
- Decrease interest rates
- Decrease in borrowings
What does a high interest coverage ratio mean
Insufficient use of leverage
Efficient generation of returns
Debt coverage ratio
Entity’s ability to remain solvent for the long term
Ability to pay off long term debt at current operation lvl=lower is better
NCL/NOCF= n times
Net tangible Asset Backing Ratio
Book value of entity’s Net tangible assets per ord. share
(Ord’s S.H’s equity- Intangibles)/(Weighted Avg no. of Ord. Shares) = n cents per share
If NTAB > Share Price, what is wrong
undervalued
pessimistic view on realisable value
Earnings per Share
Accounting profit from each share
(Profit available to Ord. S.H)/Weight Avg no. of Ord Shares= n cents per share
Ability to meet dividends and fund reinvestment
NOCF/Weight avg no of Ord. shares= n cents
Dividend Payout Ratio
Percentage as profits distributed as dividends
Dividends/Profit
or
DPS/EPS
Investors looking for income=>High ratio
Investors looking of capital growth=>Low ratio
Price Earnings Ratio
NO. of years of earnings the market is prepared to pay for entity’s shares
High ratio=High confidence
Current Market Price/EPS=n times
What are SoP/L line items expressed in terms on in vertical analysis
Sales or Revenue
Vertical analysis
Involves comparing line items to a base item (normally largest) within the same statement
What are SoFPos line items expressed in terms of vertical analysis
Tot assets
When a ratio is between a stock (A, L, Eq) and a flow (Rev, Exp, Profit, CF)
Take an average
Mark-up
(Gross profit/Cost of sales) * 100
Avg interest rate
Finance costs/Avg borrowings (C) or Interest bearing L (NC)
