Chapter 3: Financial Statements Analysis and Financial Models Flashcards
Common-Size Statements
A way of standardizing financial statements by expressing each item in the balance sheet as a percentage of total assets (balance sheet) or total sales (income statement) instead of total dollars.
Financial Ratios
Used to compare and investigate the relationships between different pieces of financial information.
Financial Ratio Categories
- Shot-term solvency, or liquidity ratios
- Long-term solvency, or financial leverage ratios
- Asset management, or turnover ratios
- Profitability ratios
- Market value ratios
Current Ratio
current assets / current liabilities
short-term liquidity ratio
should be at least 1
Quick Ratio
(current assets - inventory) / current liabilities
short-term liquidity ratio
Cash Ratio
cash / current liabilities
short-term liquidity ratio
Total Debt Ratio
(total assets - total equity) / total assets
long-term liquidity ratio
includes all debts of all maturities to all creditors
The result gives the amount of debt for each dollar in assets & the remainder is equity.
Times Interest Earned Ratio
EBIT / Interest
long-term liquidity ratio
measures how many times the company can cover its interest obligations
Cash Coverage Ratio
(EBIT + depreciation & amortization) / Interest
long-term liquidity ratio
Inventory Turnover
COGS / Inventory
turnover ratio
measures the number of times a company sold off their entire inventory during the year
higher ration means more efficiency
Days’ Sales in Inventory
365 days / inventory turnover
measures average days inventory sits before being sold
Receivables Turnover
sales / accounts receivable
turnover ratio
measures the number of times a company collected outstanding credit & lent the money again during the year
Days’ Sales in Receivables
365 days / receivables turnover
measures average days a company collects on their credit sales
Total Asset Turnover
sales / total assets
turnover ratio
the result gives the amount of sales generated from each dollar in assets
Profit Margin
Net Income / sales
profitability measure
the result gives the amount of net income from every dollar in sales
EBITDA Margin
EBITDA / Sales
Profitability measure
before-tax operating cash flow
Return on Assets
net income / total assets
profitability measure
measures the amount of profit per dollar in assets
Return on Equity
net income / total equity
profitability measure
the result gives the amount of profit for each dollar in equity
Earnings per Share
net income / shares outstanding
market value measure
Price-Earnings Ratio
price per share / earnings per share
market value measure
measures how much investors are willing to pay per dollar for current earnings
higher number means better prospects for future growth
Market-to-Book Ratio
market value per share / book value per share
market value measure
compares the market value of investments to their cost
Market Capitalization
price per share x shares outstanding
market value measure
Lets a potential buyer of the company know the minimum amount of money it would cost.
Enterprise Value
market capitalization + market value of interest-bearing debt - cash
market value measure
Gives a more complete estimate of how much it would take to buy out a company’s shares and debt
DuPont Identity
ROE = profit margin × total asset turnover × equity multiplier
Tells us that ROE is affected by 3 things:
1. Operating efficiency (measured by profit margin)
2. Asset use efficiency (measured by total asset turnover)
3. Financial leverage (measured by the equity multiplier)
