Chapter 5 Flashcards
financial statement analysis
identifies relationships between numbers within financial statements and trends in these relationships from one period to the next; goal is to help investors, creditors, managers interpret the info in statements
vertical analysis
method that attempts to overcome variations in company size by restating financial statement information in ratio (or percentage) form
common-size financial statements
restatement of components of the income statement as percent of net sales, balance items as percent of total assets; facilitates comparisons across companies of different sizes as well as comparisons of accounts within a set of financial statements
horizontal analysis
examines changes in financial data across time; helpful in analyzing company performance and in predicting future performance
return on equity (ROE) definition
primary summary measure of company performance, measures return on the investment made by the stockholders; relates net income to the average investment by shareholders as measured by total stockholders equity from the balance sheet
return on equity (ROE) equation
net income/average stockholders equity
- net income is from a point in time
- average SE= adding beginning and ending stockholders equity balances divided by 2
return on asset (ROA) definition
measures the return earned on each dollar that the firm invests in asset; captures returns generated by firm’s operating and investing activities (without regard for finance details)
return on asset (ROA) equation
earnings without interest expense (EWI)/average total assets
- EWI: net income + (interest expense X (1-statutory tax rate) )
- average total assets: add beginning and ending balances in total assets/2
earnings without interest expense (EWI) definition
measures the income generated by the firm before taking into account any of its financing costs; interest costs should be excluded
EWI equation
net income + (interest expense X (1-statutory tax rate) )
return on asset (ROA) equation detailed
net income+ (interest expense X (1-statutory tax rate) )/ (beginning total assets + ending total assets)/2
financial leverage
effect that liabilities (including debt financing) have on ROE
return on financial leverage (ROFL) equation
ROFL= ROE-ROA
profit margin (PM) definition
measures the profit, without interest expense, that is generated from each dollar of sales revenue; higher profit margin is preferable; affected by level of gross profit that the company earns on its sales which depends on product prices and cost of manufacturing; also affected by operating expenses required to support sales (wages, salaries, marketing, research and development)
capacity cost
wages and salaries, marketing, research and development, depreciation
profit margin (PM) equation
earnings without interest expense (EWI)/sales revenue
asset turnover (AT) definition
insights into company’s productivity and efficiency; level of sales generated by each dollar that company invests in assets; high asset ratio suggests that assets used efficiently- high ratio preferable; affected by inventory management practices, credit policies, and technology; improve by increasing level of sales for a given level of assets
asset turnover (AT) equation
sales revenue/average total assets
gross profit margin (GPM) definition
percentage of each sales dollar that is left over after product costs subtracted
gross profit margin (GPM) equation
sales revenue-cost of goods sold/sales revenue
expense to sales (ETS) defnition
measures percentage of each sales dollar that goes to cover a specific expense item
expense to sales (ETS) equation
expense/sales revenue
account receivable turnover (ART) definition
measures how many times receivables have been turned (collected) during a period
account receivable turnover (ART) equation
sales revenue/average accounts receivable
