Chapter 4: Ratio Analysis Flashcards
Formula: Capital Intensity
used to evaluate how much a business requires large investments (PPE)
Capital Intensity =
(Fixed Assets + Intangible Assets) \ Total Assets
Common-sized income statement & balance sheet
Shows items as % of net revenue (I/S) & % of total assets (B/S)
Percentage Change income statement & balance sheet
Shows change in items of IS as % of net revenue & % change of total assets (B/S)
Net revenue formula
Net Revenue = Gross revenue - sales discount -sales returns
profitability
relative success of a company’s operations; a measure of the extent to which accomplishment exceed effort
asset management
effective utilization of a company’s revenue producing assets; a measure of management’s ability to effectively utilize a company’s assets to produce revenue
solvency
the long term debt repayment ability of a company; a measure of a company’s long-term liquidity
liquidity
short-term debt repayment ability of a company; a measure of a company’s cash position relative to currently maturing obligations
leverage
the extend to which a company’s long-term capital structure includes debt financing; measure of company’s dependency on debt. Large debt = highly leveraged
Formula: Rate of return generated by a business for its common shareholders
ROE = (NI - Preferred Stock Dividends)/ SE
Formula: Rate of return generated by a company’s investment in assets from all sources
ROA = (NI + {1-Tax Rate}) / Total Assets
Formula: Percentage of net income remaining from a dollar of sales after subtracting all expenses
ROS = (NI + {1-tax rate})/ Net Sales
Formula: Percentage of income generated from sales after deducting the COGS
Gross Profit Margin Ratio = (Net Sales - COGS) / Net Sales
Formula: # of sales/collection cycles experienced by a firm
Receivable turnover = Net Sales / AR
Formula: # of days required to collect an outstanding AR
Receivable collection period = 365 / (Net Sales/AR)
Formula: # of production/sales cycles experienced by a firm
Inventory turnover = COGS / Inventory
Formula: # of days required to sell the inventory
Inventory on-hand period = 365 / (COGS/Inventory)
Formula: Amount of sales generated from each dollar invested in assets
Asset turnover = Net Sales / Total Assets
Formula: % of total assets held as highly liquid assets
Cash & Marketable Securities to Total Asets:
(Cash + Marketable Securities) \ Total Assets
Formula: Amount of liquid assets available to pay short term liabilities
Quick Ratio:
(Cash + Marketable Securities + AR) \ Current Liabilities
Formula: Amount of current assets available to service current liabilities
Current ratio: Current assets / Current Liabilities
Formula: # of AP cycles experienced by a firm
Accounts payable turnover = COGS / AP
Formula: # of days required to pay an outstanding account payable
Days Payable Period = 365/ (COGS/AP)
Formula: % of total assets provided by creditors
Long-term debt to total assets:
(Long-term debt + Current Portion of Long-term debt)/ Total Assets
Formula: Relative investment of long-term creditors versus shareholders in a business
Long-term debt to SE:
Long-term debt + Current Portion of Long-term debt)/SE
Formula: Extent to which current operating income covers current debt service charges
Interest coverage ratio: (NIBT + Interest Expense) / Interest Expense
Formula: Cash Collection Period
Inventory on hand period + Receivable collection period - day’s payable period
What are three components of ROE?
ROS x AT x LEV
What is the formula for sustainable growth rate?
SGR = ROE x Dividend retention rate
What are limits of financial statement analysis?
Measurement of property valuation, conservative data estimates, differing accounting methods, biased managerial data & lack of timeliness (10K published 2 months later).
