Financial Analysis Techniques Flashcards
What is “Return on Assets” (ROA)?
A profitability ratio calculated as net income divided by average total assets;
indicates a company’s net profit generated per dollar invested in total assets.
What is “Common-Size” Analysis?
The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences.
What is “Cross-Sectional Analysis”?
Also called relative analysis.
It’s an analysis that involved comparisons across individuals in a group over a given time period or at a given point in time.
What are “Activity Ratios”?
Ratios that measure how well a company is managing key current assets and working capital over time.
What are “Profitability Ratios”?
Ratios that measure a company’s ability to generate profitable sales from its resources (assets).
What are “Asset Utilization Ratios”?
Ratios that measure how efficiently a company uses its assets to generate revenues and other economic benefits.
What are “operating efficiency ratios”?
Measures how efficiently a company performs day-to-day business activities such as collection of receivables and management of inventory.
What is a “Defensive Interval Ratio”?
A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets.
Calculated as:
(Cash + Securities + Receivables) / (Daily Cash Expenditures)
What is “Net Debt”?
An issuer’s total debt less cash and marketable securities.
What is the “Debt-to-Assets” ratio?
What is its purpose?
Purpose: Solvency ratio.
Calculation: Total Debt / Total Assets
What is the “Debt-to-Capital” ratio?
What is its purpose?
Purpose: Solvency ratio
Calculation:
(Total Debt) / (Total Debt + Total Equity)
What is the “Debt-to-Equity” ratio?
What is its purpose?
Purpose: Solvency ratio.
Calculation:
Total Debt / Total Shareholders Equity
What is the “Financial Leverage Ratio”?
Average Total Assets /
Average Total Equity
What is the “Interest Coverage Ratio”?
A measure of an issuer’s ability to service its debt, typically the ratio of EBIT to Interest Expense.
What is “Interest Coverage”?
A solvency ratio calculated as:
EBIT / Interest Payments
What is the “Fixed Charge Coverage Ratio”?
A measure of how well a company’s earnings covers its fixed expenses, which may include debt payments, interest expense, and lease costs.
How do you calculated the “Fixed-Charge Coverage” ratio?
(EBIT + Lease Payments) / (Interest Payments + Lease Payments)
What is “Gross Profit Margin”?
The ratio of gross profit to revenues.
What is “Operating Profit Margin”?
EBIT / Revenue
What is Pre-Tax Margin?
EBT / Revenue
What is Dupont Analysis?
An approach decomposing return on investment (ROI) as the product of other financial ratios.
ROE =
(Net Income Margin)
x (1 / (Asset Turnover))
x (1 / (Equity-to-Capital))
What is a “Sensitivity Analysis”?
An analysis that shows the range of possible outcomes as specific assumptions are changed.
What is a “Scenario Analysis”?
A technique for exploring the performance and risk of investment strategies in different structural regimes.
What is a “simulation”?
A technique of exploring how a target variable (e.g., portfolio returns) would perform in a hypothetical environment specified by the user, rather than a historical setting.
