Financial Analysis Flashcards
Financial analysis
assess the firms performance in the context of its stated goals and strategies
2 principal tools: Ratio analysis and Cash flow analysis
> Firm determined by profitability and growth
Production/market strategy: competitive strategy, operating policies
Financial policies are affected by the firm’s financing policies and dividend policies
attempts to assess management effectiveness in each of these areas
4 key levers
> Operating management
Investment management
Financing strategies
Dividend policies
Return on Equity
> affected by 2 factors: how much profit is generated from every $ invested in assets, size of asset base relative to shareholders
Return on Asset
> based on sales
shows for each $ in sales how much the company retains as profit
decomposed NOP and operating asset turnover
Decomposing profitability
> provides a comprehensive indication of operating performance: it reflects all operating policies and eliminates the effect of debt policies
Asset operating management
> net profit margin (ROS) assesses the efficiency of a firm’s operating management
Gross profit margin affected by: price premium a firm can command, efficiency of the firm’s buying and production process
3 drivers of ROE
> Net Profit margin
> Asset turnover: using assets productively is critical to overall profitability
Assessing sustainable growth
> analysts often use the concept of sustainable growth as an overall indication of firm performance
Cash Flow analysis
> Provides an indication of the quality of the information in the financial statements
Profitable firms in a steady state should have positive cash flows from operations
