Chapter 12 Financial Statement Analysis Flashcards
What are the three methods for financial statement analysis?
1) Horizontal Analysis
2) Vertical Analysis
3) Ratio Analysis
What is the concept behind horizontal analysis?
Analysis of individual accounts (revenue, net income, expenses) over as series of time usually 2 years.
With this you can compute dollar change between years
What is the concept of vertical analysis?
Vertical analysis shows the relationship of financial statement items relative to a total which is the 100% figure
For items that are being compared on the income statement, they are compared against revenue
For items that are being compared to the balance sheet, they are compared against total assets
What is the expended DuPont ROE formula?
ROE = Net Income/Net Sales * Net Sales / Total Avg Assets * Total Avg assets/Total Avg Equity
What is the formula for profit margin under DuPont ROE?
What does profit margin tell you?
Profit Margin = Net Income /Net Sales
The profit margin tells me the efficiency of operating activities
What is the formula for asset turn over in DuPont Analysis?
What does this tell you?
The formula for asset turn over = Net Sales / Avg Total Assets
This formula tells me the effectiveness of investing activities within the company
What is the formula for financial leverage in DuPont Analysis?
Financial leverage = Average Total Asset / Avg Total Equity
This ratio measures the capital structure with regards to how the company deals with financing activities
What is the cash conversion cycle?
Cash conversion cycle is the amount of time needed for a company to sell off all its inventory and take the cash to pay back its suppliers. In short, a shorter Cash conversion cycle is better?
Can CCC be negative, and if so, what does that tell you about the company?
If Cash conversion is negative, it means that the company pays back its suppliers faster than it can sell its inventory for cash
How do you calculate cash conversion cycle?
The first stage would be to use the inventory holding period which is determined by *(365 / COGS/Avg Inventory)
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Second stage would be the receivable collection period which is determined by (365/Net Credit Sales/ Avg Acc Receivable)
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Last stage would be the payables turnover period which is determined by (365/Total Supplier Purchase / Avg Total Account Payables)
What does the times interest earned ratio tell you and what is the formula?
Times Interest earned ratio = (net income + interest expense + tax expense) / Interest expense
This ratio tells you how many times a company can use its net income to cover interest expense. The higher the ratio, the greater the solvency of the company (more liquid and able to pay off its interest expense from loans)
What is the formula for dividend yield?
What does this ratio tell you?
Dividend yield ratio = Dividend per share / market price of share
This ratio tells us how much returns in terms of dividend an investor can expect from each share. This ratio is important for investors that are looking for a steady stream of dividend income
What is the formula for P/E ratio? What does this ratio tell you about the business?
The formula for P/E is
market price per share / earnings per share
This ratio shows how much an investor is willing to pay for each unit of earning the company makes
Reflects the overall expectation of a company. The higher the ratio, the more optimistic the market is for the company. (MORE CONFIDENCE)
What are the limitations of using ratio analysis?
1) Ratio analysis does not tell you the root issue of the company’s problem
2) Legislation, internal politics and affairs can turn profits into losses within the company
What is another name for vertical analysis?
How do you prepare it?
Common size income statements
You create a vertical analysis with either:
Revenue for income statement. Revenue will be 100%
Total Assets for balance sheet. Total Assets will be 100%
