Financial Analysis Flashcards
What does the balance sheet show?
Snapshot of company’s financial position at the end of the year
What is the balance sheet identity?
Assets=liabilities+stockholders equity
What is the equation for net working capital?
Net working capital/net current assets = current assets-current liabilities
What is the equation for net book value?
Net book value = acquisition cost-accumulated depreciation
What does the income statement show?
Shows firms revenues and expenses over a given time period
What is the equation for market capitalisation?
Market capitalisation = no. Of shares X market price per share
- total value of shareholder equity
What is the equation for market value added?
MVA = market capitalisation- equity
What is the M/B or P/B ratio?
M/B = market value of equity / book value of equity
- shows how many times investors original investment has been multiplied
What is the equation for enterprise value?
Enterprise value = market value of equity + debt - cash
What are the drawbacks of market value performance measures?
- reflect investors expectations about future performance (not current performance)
- do not explain reasons underlying performance
- limited to information on public companies
What so the equation for EVA?
EVA= residual income = (after-tax interest + net income) - ( cost of capital X capital )
What is after-tax interest + net income?
Net income company would have earned with all equity financing
What is the equation for total capitalisation?
Total capitalisation = long-term debt+shareholders equity
What is the equation for ROC?
ROC=after-tax interest + net income / total capital at start of the year
- uses after-tax interest + net income which is net income available to all investors (debt and equity holders)
- capital provided by debt and equity capital so this measure is appropriate
What is the equation for ROE?
ROE=net income / book value of equity at start of the year
- uses only net income as we are only interested in return to equity holders
What is the equation for ROA?
ROA=after-tax interest + net income / total assets at the start of the year
- uses income available to all investors as capital is financed by debt and equity and assets are financed by capital
What are the advantages of EVA and accounting rates of return?
- reflect current performance and are not affected by expectations of future performance
- can be calculated at the whole company,plant or division level (including private company)
What are the limitations of EVA and accounting rates of return?
- not all assets are accounted in the balance sheet
- based on book value of assets (true value may be different)
What is the equation for asset turnover?
Asset turnover = sales / total assets at start of the year
What is the equation for profit margin?
Profit margin = net income / sales
What is the equation for operating profit margin?
Operating profit margin = after tax interest + net income / sales
What is the equation for inventory turnover?
Inventory turnover = cost of goods sold / investors at start of year
What is the equation for inventory period?
Inventory period = inventory at start of year / daily cost of goods sold
What is the equation for receivables turnover?
Receivables turnover = sales / receivables at start of year
What is the equation for receivables period?
Receivables period = receivables at start of year / average daily sales
What is the equation for the long-term debt ratio?
Long term debt ratio = long term debt / long term debt + equity
What is the equation for the long term debt to equity ratio?
Long term debt to equity ratio = long term debt / equity
What is the equation for the total debt ratio?
Total debt ratio = total liabilities/total assets
What is the equation for the Times-Interest-Earned ratio?
Times-Interest-Earned ratio = EBIT / interest payments
What is the equation for the cash coverage ratio?
Cash coverage ratio = EBIT + depreciation / interest payments
What is the equation for the net working capital to total assets ratio?
Net working capital to total assets ratio = current assets - current liabilities / total assets
What is the equation for the current ratio?
Current ratio = current assets / current liabilities
What is the equation for the quick(acid test) ratio?
Quick ratio = cash + marketable securities + receivables / current liabilities
What is the equation for the cash ratio?
Cash ratio = cash + marketable securities / current liabilities
What are the strengths of ratio analysis?
- direct users focus of attention
- identify and highlight areas of good and bad performance
- identify areas of significant change
- help different users in decision making
What are the limitations of ratio analysis?
- lack of standard definitions
- different formulas exist to calculate the same ratios
Figures taken from the balance sheet may be unrepresentative - accounting police’s may differ
- misinterpretation is possible
What row acts were introduced to improve financial reporting reduce agency problem?
- SOX 2002: aim was to improve accuracy of information reported
- Dodd-Frank Wall Street reform and consumer protection act (2010):
What are the market value performance measures?
- market capitalisation
- market value added
- M/B
- EVA
- ROC
- ROA
- ROE
What are the efficient measures?
- asset turnover
- profit margin
- operating profit margin
- inventory turnover
- inventory period
- receivables turnover
- receivables period
What are the debt ratios/leverage ratios?
- long term debt ratio
- long term debt to equity ratio
- total debt ratio
- TIE
- cash coverage ratio
What ratios are used to measure liquidity ?
- net working capital to total assets ratio
- current ratio
- quick ratio
- cash ratio
