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ABM 306: Finance > Financial Analysis > Flashcards

Financial Analysis Flashcards

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1
Q

Involves the evaluation of financial statements to gain a deeper understanding of a company’s performance and make informed business decisions.

A

Financial Analysis

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2
Q

This process helps identify trends, strengths, weaknesses, and opportunities within the organization.

A

Financial Analysis

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3
Q

Tools and Techniques in Financial Analysis

A
  • Ratio Analysis
  • Trend Analysis
  • Vertical and Horizontal Analysis
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4
Q

Ability of the company to settle
its current obligations as they fall due

A

LIQUIDITY RATIOS

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4
Q

Involves the calculation and interpretation of financial ratios to evaluate a company’s liquidity, profitability, and solvency.

A

Ratio Analysis

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5
Q

compares financial data over time to identify patterns and trends, providing insights into a company’s performance and growth.

A

Trend Analysis

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6
Q

COMMON TYPES OF LIQUIDITY RATIOS:

A
  • CURRENT RATIO
  • ACID TEST RATIO
  • RECEIVABLE TURNOVER
  • AVERAGE COLLECTION PERIOD
  • INVENTORY TURNOVER
  • AVERAGE DAYS IN INVENTORY
  • WORKING CAPITAL
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6
Q

Involve the comparison of financial statement items, either within a single statement or across multiple periods, to uncover relationships and trends.

A

Vertical and horizontal analysis

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7
Q

measures the ability of the business to pay its short-term obligation as they fall due

A

CURRENT RATIO

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8
Q

CURRENT RATIO FORMULA

A

Total Current Assets /
Total Current Liabilities

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9
Q

measures immediate liquidity with the ability to pay current liabilities with the most liquid assets

A

ACID TEST RATIO

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9
Q

ACID TEST RATIO FORMULA

A

Quick Assets* / Total Current Liabilities

*Quick Assets = Cash + Receivables + Trading Securities

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10
Q

measures the efficiency to collect the amount due from credit customers

A

RECEIVABLE TURNOVER

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11
Q

RECEIVABLE TURNOVER FORMULA:

A

Net Credit Sales / Average trade receivable*

*(Receivable Beginning + Receivable
mean that the collection department has Ending) / 2

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12
Q

Is the approximate number of days it takes a business to collect its receivables from credit or account sales

A

AVERAGE COLLECTION PERIOD

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13
Q

AVERAGE COLLECTION PERIOD FORMULA

A

365 days / Receivable Turnover

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14
Q

measures the number of times the company was able to sell its entire inventory to customers during the year

A

INVENTORY TURNOVER

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15
Q

INVENTORY TURNOVER FORMULA

A

Cost of Goods Sold / Average Inventory*

*(Beg. Inventory + Ending Inventory) / 2

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16
Q

is the average time to convert inventory to sales

A

AVERAGE DAYS IN INVENTORY

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16
Q

AVERAGE DAYS IN INVENTORY FORMULA

A

365 days / Inventory Turnover

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17
Q
  • known as Debt Ratio
  • measures business liabilities as a percentage of total assets
  • optimal debt ratio is 50%
A

DEBT TO TOTAL ASSETS RATIO

17
Q

COMMON TYPES OF SOLVENCY RATIOS:

A
  • DEBT TO TOTAL ASSETS RATIO
  • EQUITY RATIO
  • DEBT TO EQUITY RATIO
  • TIMES INTEREST EARNED
17
Q

measures the short-term liquidity of a company

A

WORKING CAPITAL

17
Q

DEBT TO TOTAL ASSETS RATIO FORMULA:

A

Total liabilities / Total Assets

17
Q

How long it would take for the company to transform inventory back to cash

A

NUMBER OF DAYS IN OPERATING CYCLES

17
Q

EQUITY RATIO FORMULA

A

Total Equity / Total Assets

17
Q

NUMBER OF DAYS IN OPERATING CYCLES FORMULA:

A

No. of Days in Operating Cycles = Ave. Collection Period + Ave. Inventory Turnover

17
Q

WORKING CAPITAL FORMULA

A

current assets - current liabilities

18
Q

the percentage of total assets financed by the owner’s investment

A

EQUITY RATIO

18
Q
  • otherwise called as leverage ratios
  • measures a company’s ability to pay its maturing long- term debts while sustaining operations indefinitely
A

SOLVENCY RATIOS

19
Q

DEBT TO EQUITY RATIO FORMULA:

A

Total Liabilities / Total Equity

19
Q

measures the company’s ability to pay the interest charged to the company for its outstanding liabilities

A

TIMES INTEREST EARNED

20
Q
  • measures the financing provided by the creditors against those provided by the owner
  • optimal fair ratio is 1 or 100%
A

DEBT TO EQUITY RATIO

21
Q

TIMES INTEREST EARNED FORMULA:

A

Earnings Before Interest and Taxes
/ Interest Expense

22
Q

this is the proportion of the gross profit of the company with its net sales

A

GROSS PROFIT RATIO

22
Q

measure a company’s overall efficiency and performance based on its ability to generate profit from operations relative to its available assets and resources.

A

PROFITABILITY RATIOS

23
Q

COMMON TYPES OF PROFITABILITY RATIOS

A
  • GROSS PROFIT RATIO
  • OPERATING PROFIT MARGIN
  • PROFIT MARGIN RATIO
24
Q

GROSS PROFIT RATIO FORMULA:

A

Gross Profit / Net Sales

25
Q

measures the percentage of income
earned after deducting the cost of sales expense.

A

OPERATING PROFIT MARGIN

26
Q

OPERATING PROFIT MARGIN FORMULA:

A

Operating Income / Net Sales

27
Q
  • measures the proportion between Ratio the Net Income and the net sales of the company
  • As a general rule, a 10% PMR is average, a 20%+ PMR is high or good, and a 5% PMR is low
A

PROFIT MARGIN RATIO

28
Q

PROFIT MARGIN RATIO FORMULA:

A

Net Income / Net Sales

28
Q
A
29
Q

OPERATING EXPENSES TO SALES RATIO FORMULA:

A

Operating Expenses / Net Sales

30
Q

COMMON RETURN ON INVESTMENT RATIOS

A
  • RETURN ON ASSETS
  • RETURN ON EQUITY
  • ASSET TURNOVER RATIO
31
Q
  • measures the company’s efficiency in using its level of investment in assets in order to generate income
  • ROA over 5% are generally considered good.
A

RETURN ON ASSETS

32
Q

RETURN ON ASSETS FORMULA

A

Net Income / Average Total Assets*

*Assets at the Beg. of the Year + Assets at Ending of the Year / 2

33
Q
  • is a more specific computation of a Equity company’s profitability because the denominator being used is the one coming from the stockholder’s alone. - ROE of 10% or more is considered good
A

RETURN ON EQUITY

34
Q

RETURN ON EQUITY FORMULA:

A

Net Income / Average Stockholder’s Equity*

  • SHE at the Beg. of the Year + SHE at Ending of the Year / 2
35
Q
  • measures the correlation between the assets owned by the company and the net sales being generated by such properties.
A

ASSET TURNOVER RATIO

36
Q

ASSET TURNOVER RATIO FORMULA

A

Net Sales / Average Total Assets*

  • (Assets at the Beg. of the Year + Assets at Ending of the Year) / 2

ABM 306: Finance (3 decks)

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