Chapter 2: Introduction to Financial Statement Analysis Flashcards
Balance Sheet
The statement of the financial position of the company. Shows the value of assets, liabilities, and equity at a particular point in time.
Basic equation of the balance sheet
Stockholder’s Equity = Assets - Liabilities. This is an accounting measure of the firm’s net worth, not the market value
Market Capitalization
The current market value of the firm as measured by what investors are willing to pay for a share of stock. This value is your future earnings potential, not your current bank balance
Formula for market capitalization
Share price * Number of shares
Book Value
An accounting measure of what you now own (your assets) - what you owe now (your liabilities). It’s your “bank balance.”
Market to Book Ratio (formula)
Market Cap./Book Value of Equity
Net Working Capital
This is the amount of money available to run the firm in the short run.
Formula of Net Working Capital
Current Assets - Current Liabilities
Current Ratio (formula)
Current Assets/Current Liabilities
Debt/Equity Ratio (formula)
Debt/Market Cap.
Debt/Capital Ratio (formula)
Debt/(Equity + Debt)
Income Statement
Statement of financial performance which shows the revenues and costs for a particular time period
Basic equation of income statement
Net Income = Revenue - Cost
Net Income
The “bottom line” so the total income after all the revenues and expenses
Gross Profit
The income or profit remaining after the production costs have been subtracted from the revenue. We can see this in the 3rd line of the income statement
Formula of Gross Profit
Gross Revenue - Cost of Revenue
Gross Margin (formula)
Gross Profit/Revenues
Operating Income
The income from operations, so the gross profit for running the firm minus the operating expenses. Located below the gross profit stuff
Operating Margin (formula)
Operating Income/Revenue
Non-Operating Income and Expenses
Income and expenses from activities not central to running the firm, such as income from investments or interest expense. This is located under the operating income line
Interest Coverage Ratio (formula)
EBIT (Earnings before Interest and Taxes)/Interest Expenses
Earnings Per Share (formula)
Net Income/# of shares
Price to Earnings Ratio (formula)
Market Cap./Net Income or Price Per Share/Earnings Per Share
Return on Equity (ROE)
Net Income/Avg. Book Value of Equity