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Financial Statement Analysis > Final > Flashcards

Final Flashcards

1
Q

ROE using the DuPont formula is:

A

Return on Assets * Income Statement Leverage * Balance Sheet Leverage

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2
Q

Is ROA influenced by financing activities?

A

No, ROA = NOPAT/Total Assets, NOPAT neutralizes for financing activities

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3
Q

What is the formula for NOPAT, and what does it approximate?

A

NOPAT approximates earnings before interest after taxes (EBIAT). The rough calculation for NOPAT is: NOPAT = Operating profit x (1 - Tax Rate)

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4
Q

What’s the formula for ROE starting from ROA?

A

ROE = ROA * I/S Leverage * B/S Leverage

to calculate your firm’s ROE, multiply Net Profit Margin times Return on Assets (ROA) times Financial Leverage.

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5
Q

Is profit margin a measure of asset efficiency and why/not?

A

Asset efficiency measures the ability of a company to generate sales from its assets, not profits.

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6
Q 
Calculate ROE given: 
NI/Sales=8%
Sales/Assets=1.6x 
Tax rate=35% 
Current ratio=2x 
ROA=0.20 
Assets/Equity=1.8x
Interest/Assets=3%
A

ROE = (NI/Sales)(Sales/Assets)(Assets/Equity) = 23.04%

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7
Q

What is the formula for days receivable?

A

(AR/Sales)*(Days = 365) = 73

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8
Q

What would we expect the fixed asset ratio for a software company to be and why?

A

Software will have fewer fixed assets and can generate a lot of sales (assuming it is a mature software company) - therefore the fixed asset turnover ratio will be high.

Fixed Asset Turnover = Sales / Net fixed assets.
Capex Ratio = Capital expenditures / Sales.
Average Age Ratio = Accumulated depreciation / Gross PP&E.
Average Age Ratio = Capital Expenditure / Depreciation.

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9
Q

What would we expect the fixed asset ratio for a retailing company to be compared to a utility and why?

A

It is likely that a retailing company will have a higher fixed asset turnover than a utility. This is assuming the retailer leases its locations and the locations are not capitalized on the B/S.

A fixed asset is a long-term tangible piece of property or equipment that a firm owns and uses in its operations

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10
Q

Can quality of earnings be evaluated by comparing cash to financing, net income, investing, operations, or cash from investing?

A

Quality of earnings is typically looked at through the lens of NI and CFO.

Operating Cash Index = (CFO - Dep)/NI

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11
Q

What are two indicators of increased bankruptcy risk?

A

Higher debt to equity ratio - High Superfluous debt can drown a company.

More fixed costs in the cost structure - Excessive fixed costs can drown a company if sales falter in times of market dislocation.

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12
Q

Does a higher current ratio increase or decrease the risk of bankruptcy?

A

Current ratio = Current assets / Current liabiliites

Higher current ratio = more liquid

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13
Q

In terms of investing and financing, what would we expect to see from a high growth firm?

A

A high growth firm is more likely to have negative CFO and positive CFF

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14
Q

What is a useful metric for evaluating a firm’s debt carrying capacity?

A

Interest coverage ratio

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15
Q

What’s the formula for current ratio?

A

current ratio = Current assets / Current liabilities

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16
Q

How is a company with negative working capital funding its current assets?

A

A firm with negative working capital is funding its current assets using current liabilities

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17
Q

Does financial leverage magnify both good and bad changes in performance?

A

Yes, financial leverage magnifies changes in performance, both good and bad.

18
Q

What are two of the limitations of using PEG ratios in relative valuation?

A
  1. It does not control for risk and 2. It is affected by differences in market risk premiums
19
Q

Where in the economic cycle are price to earnings multiples usually highest for cyclical firms?

A

The bottom - Price to earnings ratios are usually highest for cyclical firms at the bottom of the economic cycle

20
Q

In carrying out relative valuation, one of the issues to consider is differential risk between the target firm and the comparable. Which of risk-free rate, risk premium, and beta could cause differences in risk between the two firms in the same country and at the same point in time?

A

Beta, growth, and quality of earnings all matter when comparing two firms in the country and at the same time.

The risk-free rate will be identical for both firms.

21
Q

The price to book multiple is most useful for valuing which type of firm?

A

Price to book is most valuable for valuing banks

22
Q

What does degree of operating profit measure?

A

How much the operating income of a company will change in response to a change in sales - impact of sales on company earnings

23
Q

What’s the formula for degree of operating leverage?

A

((Gross Profit Curr./Gross Profit Prev)-1)
/
((Sales Curr./Sales Prev.) - 1)

24
Q

What can be said of a firm that increases revenue without increasing COGS?

A

a firm that increases revenue without increasing COGS has no variable costs in its cost structure

25
Q

If operating leverage of a firm is 4, will quantity and price impact margins?

A

built into the business model - With operating leverage built into the business model, both quantity and price will have an impact on margins.

26
Q

Will purchasing inventory with cash increase a firms quick ratio of 1?

A

Quick ratio = Quick assets/Current liabilities
Quick assets = Cash + mkt sec + A/R

Decrease in cash to purchase inventory would decrease the quick ratio

27
Q

Will collecting A/R in cash increase a firms quick ratio of 1?

A

Quick ratio = Quick assets/Current liabilities
Quick assets = Cash + mkt sec + A/R

Swapping A/R for cash would have no effect on quick ratio.

28
Q

Will purchasing inventory on credit increase a firms quick ratio of 1?

A

No - Purchasing inventory on credit would increase A/P, therefore decreasing the quick ratio

Quick ratio = Quick assets/Current liabilities
Quick assets = Cash + mkt sec + A/R

29
Q

What could explain the fact that the market price of a firm is less than the valuation of the firm based on a comparable?

A

the market price of a firm is less than the valuation of the firm based on a comparable could be due to the firm being: 1. Undervalued, 2. Riskier, or 3. having lower growth prospects.

30
Q

What is a formula for LT growth rate using P/E and PEG?

A

g = [P/E]/[PEG]

[PEG] = [P/E]/g
[P/E] = Share Price/EPS = Net Income / Total # of Shares
31
Q

What’s the formula for valuing a company given the firm’s EPS and a comparable firm’s P/E for the same year.

A

Comp P/E * EPS

PEFY1 Sketchers = 18.73x
EFY1 UA = 1.05
18.73*1.05 = $19.67

32
Q

What is the formula for calculating value of equity using the residual income method?

A

Residual Income =
Cost of Equity +
Dividends

Book Value +

(Residual Income in Future Periods/(1+Cost of Equity)^t

/(1.1)^1
/(1.1)^2 = 1.21
/(1.1)^3 = 1.331

Residual Income
= Net Income - Cost of Equity
= Equity * [Required Rate on Equity = % Cost of Equity ]

Residual Income
= Net Income - .1
= Equity * .1

10 [Book Value Per Share]
\+
1.82 [z
\+ 
1.50

Book Value Per Share

Residual Income = Net Income - Equity Charge

Equity Charge = Equity Capital * Cost of Equity

ROE = Net Income / Shareholder’s Equity

Dividend Payout = Total Dividends / Net Income

Book Value Per Share = (Shareholders’ Equity - Preferred Equity) / Avg. # of Common Shares

Cost of Equity=10%
Dividend Pay

out = 30%
Book Value per share = $10 future ROEs = 30%, 25% and 10% to perpetuity.

33
Q

What is the formula for Profit Margin from Net Income?

A

Profit Margin = Net Income + Interest Expense(1-Tax Rate)/Sales

34
Q

Four steps in firm strategy analysis:

A

Product discriminator or low cost leader
degree of integration in the value chain
degree of geographical diversification
degree of industry diversification

35
Q

Three categories of Dupont decomposition return on equity analysis

A

Return on Sales
Asset Turnover
Financial Leverage

36
Q

What is the formula for ROA starting with Net Income?

A

ROA = Net Income - Interest Expense (1-Tax Rate)/Total Assets

37
Q

What are the two parts of ROA?

A

ROA =
1. Net Income + Interest Expense (1-Tax Rate)/Sales
*
2. Sales / Total Assets

38
Q

Why do we adjust the interest expense by the tax rate when calculating ROA?

A

We adjust the interest expense by the tax rate when calculating ROA because net income is after taxes and we want to calculate EBI

39
Q

In competitive equilibrium, what should ROA approximate?

A

In competitive equilibrium the ROA for a firms should approximate the weighted average cost of capital.

40
Q

What are four factors that can account for differences in ROA across firms?

A
  1. Industry Difference
  2. Monopoly Rent
  3. Accounting Differences
  4. Risk

are all factors that can account for differences in ROA across firms

41
Q

What are four determinants of profit margin?

A

Four determinants of profit margin are:

  1. Industry Factors
  2. Sales Volume
  3. Sales Price
  4. Expenses

Financial Statement Analysis (1 decks)

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