Chapitre 6 Flashcards
Common-size analysis:
Express financial data, including entire
financial statements, in relation to a single financial statement item or
base.
vertical vs common size analysis + what are their main use
Vertical common-size
- Balance sheet: Each item as a percent of total assets.
- Income statement: Each item as a percent of total net revenues.
- Cash flow: Each line as a percent of sales, assets, or total in and out.
- Highlights composition and identifies what’s important.
* Horizontal common-size
- Percentage increase or decrease of each item from the prior year or
showing each year relative to a base year.
- Highlights items that have changed unexpectedly or have
unexpectedly remained unchanged.
main use: USE OF COMPARATIVE GROWTH
INFORMATION: (what is growing more/less compare to other lines)
what Receivables growing so much faster than revenue could indicate
It is generally more desirable to observe inventory and receivables growing at a slower (or similar) rate compared with revenue growth.
Receivables growing so much faster than revenue could indicate
Operational issues, such as lower credit standards, or
Aggressive accounting policies for revenue recognition.
what inventory growing faster than revenue can indicate
An operational problem with obsolescence, or
Aggressive accounting policies, such as an improper overstatement of inventory to increase profits. In the past, organizations have been charged by the U.S. Securities and Exchange Commission for improperly accelerating the recognition of revenue and engaging in other practices, such as billing customers for inventory prior to shipment.
(An alternative, innocuous explanation could have been that the company was building inventory in anticipation of demand.)
exemple of how ratio are interrelated
Ratios are interrelated.
For example, an inefficient firm (with low asset turnover, low receivables turnover, low inventory turnover) is likely to have poor profitability (low return on sales, low return on assets, low return on equity), leading to low market valuation (low price earnings ratios, etc.), leading to difficulty in selling equity leading to high leverage (high debt-to-equity, etc.), leading to high cost and risky funding (high funding costs in terms of higher interest expense and stricter credit policies from trade creditors), leading to poor profitability, and so on.
What are the formulas for three key profitability ratios?
Gross Profit Margin = Gross Profit / Revenue
Operating Profit Margin = Operating Profit / Revenue
Net Profit Margin = Net Profit / Revenue
What are the three components used to decompose ROE? dupond
Profit Margin (high margin products or low expenses).
Asset Turnover (efficient use of assets).
Financial Leverage (using more debt in the capital structure)
What is the formula for the cash conversion cycle?
Cash Conversion Cycle = Days Sales Outstanding + Days Inventory Held − Days Payables Outstanding.
What are the three key liquidity ratios?
.
Current Ratio = Current Assets / Current Liabilities.
Quick Ratio = (Cash + Receivables) / Current Liabilities.
Cash Ratio = Cash / Current Liabilities
What is the Altman Z-Score used for?
To predict bankruptcy risk; a score below 1.81 indicates higher bankruptcy risk.
What does a low or declining asset turnover ratio suggest?
Sluggish sales.
Heavy investment in assets (e.g., modernization or strategic shifts).
Changes in asset mix.
ROE (5 factor dupond)
= (Net Income / EBT) × (EBT / EBIT) × (EBIT / Revenue) × (Revenue / Average Assets) × (Average Assets / Average Equity).
8 activity ratio
Working Capital Turnover = Revenue / Average Working Capital
Fixed Asset Turnover = Revenue / Average Net Fixed Assets
Total Asset Turnover = Revenue / Average Total Assets
Inventory Turnover = Cost of Sales / Average Inventory
Days of Inventory on Hand (DOH) = Number of Days in Period / Inventory Turnover
Receivables Turnover = Revenue / Average Receivables
Days of Sales Outstanding (DSO) = Number of Days in Period / Receivables Turnover
Payables Turnover = Purchases / Average Trade Payables
Number of Days of Payables = Number of Days in Period / Payables Turnover
liquidity ratio
Current ratio = Current assets/Current liabilities
Quick ratio = (Cash + Short-term marketable investments + Account receivables)/Current liabilities
Cash ratio = (Cash + Short-term marketable investments)/ Current liabilities
Days of Sales Outstanding (DSO) = Number of Days in Period / Receivables Turnover
Days of Inventory on Hand (DOH) = Number of Days in Period / Inventory Turnover
Number of Days of Payables = Number of Days in Period / Payables Turnover
Cash Conversion Cycle = DSO + DOH − Number of Days of Payables
solvency ratio
Debt Ratios:
Debt-to-Assets Ratio = Total Debt / Total Assets
Debt-to-Capital Ratio = Total Debt / (Total
Debt + Total Shareholders’ Equity)
Debt-to-Equity Ratio = Total Debt / Total Shareholders’ Equity
Financial Leverage Ratio = Average Total
Assets / Average Total Equity
Debt-to-EBITDA Ratio = Total Debt / EBITDA
Coverage Ratios:
Interest Coverage = EBIT / Interest Payments
Fixed Charge Coverage = (EBIT + Lease Payments) / (Interest Payments + Lease Payments)
