Chapter 2 Flashcards
Financial statements
i) balance sheet
ii) income statement
iii) statement of cash flows
iv) statement of changes in shareholders’ equity
Asset book value
value after accumulated depriciation
Shareholder equity
Assets - Liabilities (worth of the firm)
Assets = ?
Liabilities + Shareholders Equity
Firm’s market value
market price per share * shares
Liquidation value
what would be left if the firm sold all its assets and paid its liabilities
Market - Book ratio
market value of equity / book value of equity
What does a >1 Market Book ratio mean?
That the value of the firm’s assets as used currently exceeds their liquidation value
Debt- equity ratio (Leverage)
Total debt / Total equity
Value stocks
low market to book ratio
Growth stock
high market to book ratio
Enterprise value
Market capitalization + debt - cash
EPS (earnings per share)
Net Income / Shares outstanding
Gross margin
Gross profit / sales
Operating margin
Operating income / sales
Net profit margin
Net Profit / Sales
Asset turnover
Sales / Total assets
Fixed asset turnover
Sales / Fixed assets
Accounts receivable days (average collection period or days sales outstanding)
Accounts receivable / Average daily sales
Inventory turnover
Cost of goods sold / inventory
Interest coverage ratio
Interest / Earnings
Return on equity
Net income / Book value of equity
Return on assets
Net income / Total assets
DuPont identity
(Net income/sales) * (Sales/ Total assets) * (Total assets/ total equity) {profit margin x asset turnover x equity multiplier} these are the key drivers of net income.
Price-Earnings ratio (P/E)
Market capitalization / Income = Share price / Earnings per share
Income Statement
Shows revenues and expenses over a period. Bottom line shows the Net income, a measure of post taxation profitability.
Statement of cash flows
Measures the change in cash over a period. Divided by 3 parts.
a) operating activities
b) investment activities
c) financing activities
Auditor
neutral third party that ensures that corporations’ financial statements are prepared according to GAAP and IFRS (Reporting standards).
To verify the info is reliable.
Earnings
what is left for the shareholders once all expenses have been paid for
Dilution
growth in the amount of shares in a corporation, reducing the earnirngs per share
Off-balance-sheet transactions
joint ventures, operating lease, R&D
Sarbanes-Oxley Act
2002, the US Congress passed the Sarbanes-Oxley Act. This act requires, among other things, that CEOs and CFOs of US corporations certify the accuracy and appropriateness of their firm’s financial statements. Penalties if statements proved fraudulent.
