Chapter 5 Financial Analysis Flashcards
_____ and _____ drive firm value
PROFITABILITY and GROWTH
What are the 4 levers managers can employ to achieve growth and profit targets?
Operating management
Investment management
Financing strategy
Dividend policy
What kind of analysis is used to evaluate the firms effectiveness in the following?
Operating management
Investment management
Financing strategy
Dividend policy
Ratio analysis
What are some of the comparison benchmarks used when evaluating ratios?
Ratios over time from prior periods (time series)
Ratios of other firms in the industry (cross-sectional)
Some absolute benchmark
Effective ratio analysis must attempt to relate underlying ____ factors to the ______ numbers
business factors
financial numbers
Return on _______ is a comprehensive performance indicator because it shows how well managers are employing the funds invested by the firm’s shareholders to generate returns.
(essentially, how well the company is using shareholders’ investment in the firm)
Equity
Return on _______ signifies how good the company is in generating returns on the investment it received from its shareholders
(essentially, how well the company is using shareholders’ investment in the firm)
Equity
true or false
To understand the extent to which the company’s return on invested capital results from its operating versus its non-operating activities we examine by DECOMPOSING the ROE.
true
(traditional approach) ROE can be decomposed into
ROE = RO___ X ______ Leverage
Return on Assets
Financial Leverage
RO___ tells you how much profit a company is able to generate for each dollar of assets invested
assets
______ leverage indicates how much assets the firm is able to deploy for each dollar invested by its shareholders
Financial
Identify the limitations of the traditional approach to decomposing a firm’s ROE.
The denominator includes the assets claimed by all providers of capital to the firm, but the numerator includes only the earnings available to equity holders.
The assets themselves include both operating assets and financial assets such as cash and short-term investments.
Net income includes income from operating activities as well as interest income and expense, which are consequences of financing decisions. Often it is useful to distinguish between these two drivers
of performance.
Financial leverage ratio used above does not recognize the fact that a firm’s cash and short-term investments are in essence “negative debt” because they can be used to pay down the debt on the company’s balance sheet.
What are the 2 primary tools in financial analysis?
Ratio analysis
Cash flow analysis
_____ ANALYSIS assesses how various line items in financial statements relate to each other and to measure relative performance.
RATIO
____ _____ ANALYSIS evaluates liquidity and the management of operating, investing, and financing activities.
CASH FLOW
a firm’s performance metrics are impacted by what 2 things?
1) ______ decisions: Product differentiation, pricing, customer credit…
2) ________execution: Cost control, reviews of existing stores, location of new stores…
Strategic
Management
TRUE OR FALSE:
Regarding Cash Flow Analysis, all ratios using income statement numbers are based on accrual basis accounting.
TRUE
Cash flow analysis can provide further insights into ______, ________, and _____ activities.
Since 1988, all U.S. companies are required to include a statement of cash flows in their financial statements.
OPERATING
INVESTING
FINANCIING
Differences in reporting cash flow information allow for variation across firms that complicate comparisons.
Analysts can make adjustments to arrive at _____ cash flows, a commonly used metric for financial analysis.
FREE
When decomposing net profit margins, common-sized income statements facilitate comparisons of key line items across time and different firms.
Additionally, the following ratios are also helpful:
_____profit margin
______ margin
____ margin
Recurring ___ margin
Gross Profit Margin
EBITDA margin
NOPAT margin
Recurrent NOPAT
____ _____ margin = (Sales −Cost of sales)/Sales
Measures the profitability of sales, less direct costs of sales
gross profit margin
A detailed analysis of _____ turnover allows the analyst to evaluate the effectiveness of a firm’s investment management.
Two primary areas of investment management
1) ____ ______ management
2) Management of _____-______ assets
ASSET
WORKING CAPITAL
LONG-TERM ASSETS
______ capital is the difference between operating assets (≈current assets) and operating liabilities (≈current liabilities).
WORKING CAPITAL
From working capital management perspective:
Lower Days’ Receivables is \_\_\_\_\_ Higher A/R Turnover is \_\_\_\_\_ Lower Days’ Inventory is \_\_\_\_\_\_ Higher Inventory Turnover is \_\_\_\_\_\_ Higher Days’ Payables is \_\_\_\_\_\_ Lower A/P Turnover is \_\_\_\_\_
better
Cash Conversion Cycle which measures the length of time, in days, it takes for a company to convert resource inputs into cash flows.
Shorter CCC is ____ and can be negative
better
Liquidity analysis relates to evaluating current liabilities Which of the following ratios to help evaluate liquidity?
Current ratio Quick ratio Cash ratio Operating cash flow ratio Gross profit margin EBITDA margin NOPAT margin Recurring NOPAT margin
Current ratio
Quick ratio
Cash ratio
Operating cash flow ratio
The remaining relate to ratios used to decompose net profit margins.
