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’
DSO
” Days Sales Outstanding “
= 365 / Accounts Receivable Turnover
• Reflects the number of days (on average) it takes a company to collect its receivables)
• an ‘Operating Efficiency Ratio’
Purchases
= Ending Inventory + COGS – Beginning Inventory
- For calculating Accounts Payable Turnover
Accounts Payable Turnover
= Purchases / Accounts Payable
- This is a measure of the number of times over a fiscal period (in this case one year) that the firm pays its suppliers.
• an ‘Operating Efficiency Ratio’
DPO
“Days Payable Outstanding”
= 365 / Accounts Payable Turnover
- This simply converts the Accounts Payable Turnover into a measure based upon “days”.
• an ‘Operating Efficiency Ratio’
Short-term Solvency Ratios
- Current Ratio
- Quick Ratio
Current Ratio
= Current Assets / Current Liabilities
-This ratio is a liquidity measure, i.e. how easily the firm will be able to cover its short term obligations.
• a ‘Short-term Solvency Ratio’
Quick Ratio
= Liquid Current Assets / Current Liabilities
• By Liquid Current Assets, we mean mainly cash, marketable securities, and receivables.
• Referred to as the acid test
• A Liquidity Ratio
• a ‘Short-term Solvency Ratio’
Long-term Solvency Ratios
- Debt Ratio
- Interest Coverage
- Cash Interest Coverage
Debt Ratio
= (S/T + L/T Debt) / (S/T + L/T Debt + Equity)
- This shows how the firm is financed.
• a ‘Long-term Solvency Ratio’
Interest Coverage
= EBIT / Interest Expense
- This shows the number of times that EBIT exceeds interest expense. Another variation is calculated as EBITDA / Interest Expense.
• a ‘Long-term Solvency Ratio’
Market Ratios
- Dividend Payout Ratio
- Dividend Yield
- P/E Ratio
Dividend Payout Ratio
= Total Dividends / Net Income
• a ‘Market Ratio’
P/E Ratio
Price / Earnings Ratio
= Market Price per Share/ Earnings per Share
• Reflects the stock market’s assessment of a company’s future performance
• a ‘Market Ratio’
EPS
Earnings per Share (EPS)
= Net Income / Weighted Average Number of Common Shares Outstanding
• Only ratio required by GAAP
• a ‘Profitability Ratio’
Average Total Assets
= (Opening Assets + Closing Assets) / 2
Exam calculations
Basic Calculations and Information Gathering:
• Ratio Table
• Horizontal/ Vertical Analysis
• Cashflow Statement
• Analysis of ROE
Exam: Writing the memo
• Liquidity (short term) / Solvency (long- term) - Ability to pay bills and debt
• Operating
• Profitability
• Future recommendations to CEO and Company
Sustainable Growth Model (formula)
= (1 - Earnings Retention Ratio) x (Leverage Ratio) x (Net Margin) x (Asset Turnover Ratio)
also = ROE x Earnings Retention Ratio
is the maximum rate of growth that a company can sustain without having to finance growth with additional equity or debt.
Earnings Retention Ratio
= (1 - (Dividends + Share Repurchase)/Net Income)
