Financial Analysis Flashcards
What is the balance sheet
a list of assets and liabilities. It is a snapshot of a firm’s finances at a fixed point in time
What two things always balance
net assets and total equity
what is the equation for net current assets
current assets - current liabilities
what is the equation for net assets
net current assets + non-current assets - non-current liabilities
what are assets
things the business owns
what are liabilities
debts the business owes
what are bad debts
debts that debtors won’t ever pay
what is working capital
the amount of cash the business has available to pay its day-to-day debts
what is the equation for working capital
current assets - current liabilities
what is net realisable value
the amount a company could get by selling the stock right not in its current state
what do assets do overtime
depreciate
which stakeholders are particularly interested in working capital and liquidity
suppliers
what can you see by comparing balance sheets
long-term trends
what does the income statement show
revenue and expenses
how long should an income statement cover
a 12 month period
which different measures of profit does the income statement show
gross profit, operating profit, profit before tax, profit for the year
the equation for gross profit
revenue - cost of sales
equation for operating profit
gross profit - operating expenses
equation for profit before tax
operating profit - other expenses
equation for profit for the year
profit before tax - tax
why is financial analysis useful
businesses can compare current performance to their past performance as well as their own performance in the past
limitations of financial analysis
it only takes into account financial data. Does not factor for data like the quality of staff and product, market share, productivity levels.
limitation of balance sheet
it will not help predict the future. Doesn’t give any clues about the market or the economy.
the equation for current ratio
current assets / current liabilities
the equation for ROCE
operating profit / total equity + non current liabilities x100
what are the liquidity ratios
current ratio and ROCE
what are the efficiency ratios
inventory turnover, payable days and receivable days
what is the equation for inventory turnover
cost of sales/cost of average stock held
what is the equation for payable days
payables/cost of sales x 365
what is the equation for receivable days
receivables/sales revenue x 365
what is the equation for gearing
non current liabilities / total equity + non current liabilities
what does gearing show
how vulnerable a business is to changes in interest rates
what are benefits of being highly geared
increased borrowing results in extra funds for expansion
when interest rates are very low, high gearing is less risky
Benefits of ratio analysis
good way of assessing performance
can be used to help decision making
potential investors can look at them
limitations of ratio analysis
doesn’t account for internal strengths, external factors and future changes
