chapter 6 book Flashcards
net profit margin
net income/revenue
higher ratio means higher profitability
ROA
operating income/average total assets
or
operating income/ending value of asset
or
operating income/ beginning assets
ROE
Net income/average shareholder equity
12 months trailing ratio
earnings for the year ended - earnings for the six months ended in the same year + earnings for the six months ended in the year after
common-size analysis
Common-size analysis involves expressing financial data, including entire financial state- ments, in relation to a single financial statement item, or base. Items used most frequently as the bases are total assets or revenue. In essence, common-size analysis creates a ratio between every financial statement item and the base item.
vertical common size balance sheet
vertical common-size balance sheet, prepared by dividing each item on the balance sheet by the same period’s total assets and expressing the results as percentages, highlights the composi- tion of the balance sheet.
horizontal common size balance sheet
A horizontal common-size balance sheet, prepared by computing the increase or decrease in percentage terms of each balance sheet item from the prior year or prepared by dividing the quantity of each item by a base year quantity of the item, highlights changes in items
vertical common size income statement
A vertical common-size income statement divides each income statement item by revenue, or sometimes by total assets
cross-sectional analysis
Cross-sectional analysis (sometimes called “rela- tive analysis”) compares a specific metric for one company with the same metric for another company or group of companies, allowing comparisons even though the companies might be of significantly different sizes and/or operate in different currencie
if net income increase faster than revenue
more profitability
revenue is increasing more quickly than asset
more efficiency
receivables that increase faster than revenue
can indicate operational issue, like lower credit standards or aggressive accounting policies
inventory growing faster than revenue
operational problem with obsolescence or aggressive accounting policies, such as an improper overstatement of inventory to increase profits.
activity ratios
Activity ratios measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.
liquidity ratios
Liquidity ratios measure the company’s ability to meet its short-term obligations.
solvency ratios
Solvency ratios measure a company’s ability to meet long-term obligations. Subsets of
these ratios are also known as “leverage” and “long-term debt” ratios.
profitability ratios
Profitability ratios measure the company’s ability to generate profits from its resources (assets).
valuation ratios
Valuation ratios measure the quantity of an asset or flow (e.g., earnings) associated with ownership of a specified claim (e.g., a share or ownership of the enterprise).
activity ratio: inventory turnover
Cost of sales or cost of goods sold/Average inventory
DOH = days of inventory on hand
number of days in period/inventorry turnover
A higher inventory turnover ratio implies a shorter period that inventory is held, and thus a lower DOH. In general, inventory turnover and DOH should be benchmarked against industry norms.
A high inventory turnover ratio relative to industry norms might indicate highly effective inventory management.
A low inventory turnover ratio (and commensurately high DOH) relative to the rest of the industry could be an indicator of slow-moving inventory, perhaps due to technological obsolescence or a change in fashion.
receivables turnover
revenue/average receivables
days of sale outstanding DSO
number of days In prior/receivable turnover
The number of DSO represents the elapsed time between a sale and cash collection, reflecting how fast the company collects cash from customers to whom it offers credit.
A relatively high receivables turnover ratio (and commensurately low DSO) might indicate highly efficient credit and collection. Alternatively, a high receivables turnover ratio could indicate that the company’s credit or collection policies are too stringent, suggesting the possibility of sales being lost to competitors offering more lenient terms. A relatively low receivables turnover ratio would typically raise questions about the efficiency of the compa- ny’s credit and collections procedures.
payable turnover
purchases/average trade payables
The number of days of payables reflects the average number of days the company takes to pay its suppliers, and the payables turnover ratio measures how many times per year the company theoretically pays off all its creditors.
A payables turnover ratio that is high (low days payable) relative to the industry could indicate that the company is not making full use of available credit facilities; alternatively, it could result from a company taking advantage of early payment discount
An excessively low turnover ratio (high days payable) could indicate trouble making payments on time, or alterna- tively, exploitation of lenient supplier terms.
number of days payable
number of days in period/ payables turnover
working capital turnover
revenue/average working capital
fixed asset turnover
revenue/average net fixed asset
total asset turnover
revenue/average total assets
current ratio
current asset/current liabilities
This ratio expresses current assets in relation to current liabilities. A higher ratio indicates a higher level of liquidity (i.e., a greater ability to meet short-term obligations). A current ratio of 1.0 would indicate that the book value of its current assets exactly equals the book value of its current liabilities.
A lower ratio indicates less liquidity, implying a greater reliance on operating cash flow and outside financing to meet short-term obligations. Liquidity affects the company’s capacity to take on debt.
quick ratio
Cash + Short-term marketable investments + Receivables/ current liabilities
cash ratio
Cash + Short-term marketable investments/CL
defensive interval ratio
Cash + Short-term marketable investments +
Receivables/ Daily Cash expenditures
This ratio measures how long the company can continue to pay its expenses from its existing liquid assets without receiving any additional cash inflow
cash conversion cycle
DOH + DSO – Number of days of payables
This metric indicates the amount of time that elapses from the point when a company invests in working capital until the point at which the company collects cash
A shorter cash conversion cycle indicates greater liquidity. A short cash conversion cycle implies that the company only needs to finance its inventory and accounts receivable for a short period of time. A longer cash conversion cycle indicates lower liquidity; it implies that the company must finance its inven- tory and accounts receivable for a longer period of time, possibly indicating a need for a higher level of capital to fund current assets.
debt to asset ratio
total debt/total asset
percentage of asset financed with debt
debt to capital ratio
total debt / total debt + total shareholders’ equity
amount of capital represented by debt
debt to equity ratio
total debt/total shareholder equity
financial leverage ratio
average total assets/average total equity
measures the amount of total assets supported for each money unit of equity.
debt to ebitda
total debt/ebidta
interest coverage
ebit/interest payment
higher interest coverage ratio indicates stronger solvency, offering greater assurance that the company can service its debt (i.e., bank debt, bonds, notes) from operating earnings.
fixed charge coverage
Ebit + lease payment / interest payment + lease payment
gross profit margin
gross profit/revenue
indicates the percentage of revenue available to cover operating and other expenses and to generate profit. Higher gross profit margin indicates
some combination of higher product pricing and lower product costs. The ability to charge a higher price is constrained by competition, so gross profits are affected by (and usually inverse- ly related to) competition.
operating profit margin
operating income/revnue
an operating profit margin increasing faster than the gross profit margin can indicate improvements in controlling operating costs, such as administrative overheads.
pretax margin
ebit/revenue
net profit margin
net income/revenue
operating ROA
operating income/average total assets
ROA
net income/average total assets
Return on total capital
EBIT/ average short and long term debt and equity
ROE
net income/average total equity
return on common equity
net income- preferred dividends/average common equity
decomposition of ROE
net income/revnue(net profit margin) * revenue/avg total assets(asset turnover ratio) * average total assets/avg shareholder equity(financial leverage)
2 decomposition of ROE
net income/EBT * EBT/EBIT * EBIT/ revenue * revenue/average total assets * avg total assets/ average shareholders equity
tax burden * interest burden * ebit margin * total asset turnover * leverage
P/E
price/ernigns per share
P/CF
price per share/cash flow per share
P/S
price per share/sales per share
P/BV
price per share/book value per share
dividend payout ratio
dividends per share/ernigns per share
dividend yield
dividends per share/price
