Ch 3: Financial Statements Analysis and Financial Models Flashcards
What is a common-size balance sheet?
computes all accounts as percent of total assets
What is a common size income statement?
computes all line items as percent of sales
What are examples of liquidity ratios?
current, quick, cash
What are examples of leverage ratios?
total debt, debt/equity, equity multiplier
What are examples of coverage ratios?
times interest earned, cash coverage
What does the current ratio (CA/CL) measure?
short term liquidity
What does the quick ratio measure?
how much of firm’s current assets are inventory
What does the inventory turnover ratio measure?
number of times the entire inventory is sold off in the year
What does the days’ sales in inventory measure?
how many days it takes to completely sell your inventory
What does total asset turnover measure?
- amount in sales generated for each $ in assets
- asset use efficiency
What does the profit margin measure?
- how much a firm generates in net income for every $ in assets
- firm’s operating efficiency
- how well it controls costs
What does the return on assets (ROA) measure?
measure of profit per dollar of assets
What does the return on equity (ROE) measure?
measure of how the stockholders fared during the year; amount generated in profit per $ of equity
What does the equity multiplier measure?
firm’s financial leverage
What type of decision is investing in new assets?
capital budgeting
