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ARA ratios Flashcards

1
Q

Horizontal Analysis

A

Compares reported amounts across different periods to identify change by SIGNIFICANCE and MAGNITUDE

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2
Q

Absolute change

A

(Reported amount in current period)-(Reported amount in previous period)

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3
Q

Relative change (%)

A

[(Reported amount in current period)-(Reported amount in previous period)]/Reported amount in previous period

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4
Q

Trend analysis

A

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

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5
Q

ROE

A

Return to ordinary S.H

Higher=Better

[(Profit available to Ord. S.H)/(Avg of Ord. S.H’s Equity or Tot Equity)]*100

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6
Q

What causes ROE to increase

A

Increase in profit
- Increase in revenue
- Decrease in expense

Decrease in equity
- Share buybacks
- Dividends

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7
Q

ROA

A

Ability to use resources to produce returns

Higher=better

[(EBIT)/Avg Tot Assets]*100

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8
Q

What causes ROA to increase

A

Increase in EBIT
- Increase in revenue
- Decrease in expense (exclude interest and tax)

Decrease in Tot Assets
- Diposals
- Depreciation & Amortisation
- Impairment

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9
Q

Gross profit margin

A

Indicator of mark-up
rate at which sales generate revenue

(Gross Profit/Sales Revenue)*100

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10
Q

EBIT profit margin

A

Rate at which sales generate EBIT

(EBIT/Sales Revenue)*100

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11
Q

What causes profit margin to increase

A

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

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12
Q

Expense ratio

A

Rate at which sales revenue is absorbed by a specific expense

[(Selling & (insert line item SoP/L ) Expense)/Sales Revenue]*100

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13
Q

What can decrease Expense ratio

A

Increase in revenue

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14
Q

Cash Flow to Sales Ratio

A

Rate at which sales revenue generates operating CF

(Net Operating CF/Sales Revenue)*100

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15
Q

What causes CF to Sales ratio to increase

A

Increase in operating inflows
Decrease in operating outflows

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16
Q

Asset Turnover

A

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

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17
Q

What causes ATO to increase

A

Increase in sales rev
Decrease in avg assets

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18
Q

What is the relationship between Profit Margin, ATO and ROA

A

PM *ATO=ROA

Increase in ROA=Increase in PM or ATO

PM and ATO are inversely related

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19
Q

Inventory Turnover/Days Inventory

A

Avg no. of days inventory is held

(Avg Inventory * 365)/Cost of Sales

20
Q

What causes improvement in Inventory Turnover

A

Sell more
Sell quicker
Hold less

21
Q

Days sales outstanding

A

A measure of asset efficiency; no. of day b/w sale and cash receipt

(Avg Trade Receivables *365)/Sales Revenue

22
Q

What causes improvement in days sales outstanding

A

Reduced credit terms
Discounts on prompt payment
Improve screening/collection procedure

23
Q

Days Purchases outstanding

A

Avg time to pay for inventory purchases

(Avg Trade Payable*365)/(Cost of Sales + Net increase in Inventory)

24
Q

What causes changes in Days Purchases outstanding

A

Changes in CF
Changes in suppliers credit terms

25
Q

Current Ratio/Working Capital Ratio

A

CA/CL (either as ratio or %)

26
Q

What causes increase in current ratio

A

Increase in CA
- Cash injection
- Increase in inventory turnover
- Liquidate NCA

Decrease in CL
- Decrease in payables
- Defer loans to NC

27
Q

Quick Ratio

A

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)

28
Q

What causes increase in quick ratio

A

Increase in CA
Decrease in CL

29
Q

CF ratio

A

Amount of OCF to service CL

(Net operating CF or CGO)/CL=n times

better than current ratio

30
Q

Debt Ratio

A

Extent to which entity has used debt to finance its investment in assets

Tot L/Tot A (%)

31
Q

What are alternatives to Debt Ratio

A

Equity Ratio=100%-Debt Ratio=Tot Eq/Tot A

Debt to Equity Ratio=Tot L/Tot Eq

32
Q

What causes Debt Ratio to increase

A

Increase in borrowings
Decrease in Eq
Decrease in A

33
Q

Interest Coverage Ratio/Times interest earned

A

Ability for entity to generate earning to cover finance costs

EBIT/Finance Costs=n times

34
Q

What causes interest coverage ratio to increase

A

Increase in EBIT
Decrease in interest expense
- Decrease interest rates
- Decrease in borrowings

35
Q

What does a high interest coverage ratio mean

A

Insufficient use of leverage
Efficient generation of returns

36
Q

Debt coverage ratio

A

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

37
Q

Net tangible Asset Backing Ratio

A

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

38
Q

If NTAB > Share Price, what is wrong

A

undervalued
pessimistic view on realisable value

39
Q

Earnings per Share

A

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

40
Q

Dividend Payout Ratio

A

Percentage as profits distributed as dividends

Dividends/Profit

or

DPS/EPS

Investors looking for income=>High ratio

Investors looking of capital growth=>Low ratio

41
Q

Price Earnings Ratio

A

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

42
Q

What are SoP/L line items expressed in terms on in vertical analysis

A

Sales or Revenue

43
Q

Vertical analysis

A

Involves comparing line items to a base item (normally largest) within the same statement

44
Q

What are SoFPos line items expressed in terms of vertical analysis

A

Tot assets

45
Q

When a ratio is between a stock (A, L, Eq) and a flow (Rev, Exp, Profit, CF)

A

Take an average

46
Q

Mark-up

A

(Gross profit/Cost of sales) * 100

47
Q

Avg interest rate

A

Finance costs/Avg borrowings (C) or Interest bearing L (NC)

ARA (3 decks)

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