Cycle 3: Key Info Flashcards
Common Size - Income Statement
Dividing each line of the Income Statement by Total Revenues (top line) - (total sales becomes 1.0 or 100%)
Common Size - Balance Sheet
All items on the Balance Sheet are divided by Total Assets (or Total Liabilities + Shareholders Equity)
•Total Assets and (Total Liabilities + Shareholders Equity) is set to 1.0
Profitability Ratios
- Profit Margin
- Asset Turnover
- Leverage
- Return on Equity
- Return on Assets
- Return on Invested Capital
- Total Return to Shareholders
EBIT
= Sales – COGS – SG&A Expenses – R&D Expenses – D&A
- EBIT is an improvement on Net Income because it focuses on the core components of Net Income but does not include non-core items, such as various gains and losses.
EBITDA
= EBIT + D&A
- EBITDA is often used as a crude proxy for Cash Flows from Operations (CFO), which is an important measure that is used to estimate a firm’s value.
Effective Tax Rate
= Income Tax Expense / Pretax
- It is not the Statutory Tax Rate, which is passed by government.
- ## It can be the same as the Statutory Tax Rate when there are no permanent differences between GAAP income and taxable income. Examples of differences include interest received on municipal bonds, which reduces the Effective Tax Rate because it is non-taxable income.
Market Cap
= Price per share * No. of shares outstanding
- Market Cap shows the value of a firm’s equity at any given point in time.
Net Profit Margin
= Net Income / Total Revenues (e.g. Sales)
- It is also sometimes called “Return on Sales” and “Net Profit Margin”
- Shows how many cents of each pound (or other currency) of sales made it all the way to the “bottom line”.
- a ‘Key Profitability Ratio’ and component of Sustainable Growth Model
Asset Turnover
= Net Sales / Average Total Assets
- Shows how many pounds of sales are generated from each pound of assets. It is a measure of how efficiently the assets are used to generate sales.
- Higher Ratio means assets are used better
- a key ‘Profitability Ratio’ and component of Sustainable Growth Model
Leverage
= Assets / Equity
* This shows how the firm is financed. Leverage is also called the “equity multiplier” or the “debt burden ratio”.
- a key ‘Profitability Ratio’ and component of Sustainable Growth Model
ROE
“Return on Equity”
= Net Income / Total Shareholder’s Equity - OR-
= Net Income / Sales * Sales / Assets * Assets / Equity
- It is a very popular performance measure that relates the earnings of the firm to the amount of shareholders’ equity
• a ‘Profitability Ratio’
ROA
“Return on Assets”
= Net Income / Average Total Assets
• This relates Net Income to the total asset base, rather than just to Owners’ Equity.
• a ‘Profitability Ratio’
ROA (DuPont Method)
“Return on Assets”
= Net Profit Margin * Asset Turnover
Operating Efficiency Ratios
- Accounts Receivable Turnover
- Days Sales Outstanding (DSO)
- Inventory Turnover
- Days Sales in Inventory (DSI)
- Operating Cycle
- Purchases
- Accounts Payable Turnover
- Days Payable Outstanding (DPO)
- Cash Cycle
Accounts Receivable Turnover
= Sales / Accounts Receivable
• This is a measure of the number of times over a fiscal period (in this case one year) that the firm collects its Accounts Receivable.
- The higher the number the faster the cash is realized from credit sales
• an ‘Operating Efficiency Ratio’
