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ACCT310 > Financial Analysis Techniques > Flashcards

Financial Analysis Techniques Flashcards

1
Q

Financial Analysis Tools (4)

A
  • Graphs
  • Regression
  • Common Size Analysis
  • Financial Ratio Analysis
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2
Q

Graphs (2)

A
  • Comparison of performance and financial structure over time
  • Visual overview of risk trends in business
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3
Q

Pie charts are most useful to communicate…

A

Composition of total value

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4
Q

Line graphs are useful when… (2)

A

focused on change for a
*limited number of items
*over a relatively longer period of time

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5
Q

Stacked column graph is useful… (3)

A

to show both
*composition
*amounts
*change over time

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6
Q

Regression Formula =

A

y = slope coeff. x + constant

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7
Q

Slope coeff. represents…

A

when x changes, y will change proportionally by the amount of the slope coeff.

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8
Q

Common-size analysis

A

expresses financial data in relation to a single financial statement item or base

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9
Q

Vertical Common Size highlights…

A

composition and identifies what’s important in the form of percentages of the largest amount

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10
Q

B/S Vertical Common Size

A

Each item as a percentage of total assets

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11
Q

I/S Vertical Common Size

A

Each item as a percentage of total revenue

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12
Q

C/F Vertical Common Size

A

Each line as a percentage of sales, assets or total in and out

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13
Q

Horizontal Common Size highlights…

A

Items that have changed unexpectedly or have unexpectedly remained unchanged

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14
Q

Horizontal Common Size shows…

A

percentage increase or decrease of each item from the prior year or relative to a base year

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15
Q

Cross-sectional common size analysis compares…

A

One metric for one company with the same metric for another company or group of companies - time period is fixed

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16
Q

Trend common size analysis compares…

A

across periods of time between 3-10 years (longer time period)

17
Q

Ratios (4)

A

*express one number in relation to another
* standardise financial data in terms of mathematical relationships
* facilitate comparisons - trends and across companies
* are interrelated

18
Q

Ratios are not an answers, they are an…

A

indicator

19
Q

Interpretation generally involves…

A

comparison

20
Q

Analysis will address the question of…

A

why?

21
Q

Financial ratios can provide insights into… (5)

A
  • Microeconomic environments
  • company’s financial flexibility
  • managements ability
  • changes in company or industry over time
  • comparability with competitors
22
Q

Limitations to ratio analysis… (3)

A

*Results may be inconsistent
*The need to use judgement
*The use of alternative accounting methods

23
Q

Activity Ratios show…

A

Asset utilisation - how efficient the firm’s operations and the firm’s management of assets?

24
Q

Liquidity Ratios show…

A

How well is the firm positioned to meet its short-term obligations?

25
Q

Solvency Ratios show..

A

How well is the firm positioned to meet long-term obligations?

26
Q

Profitability Ratios show…

A

How and how much is the firm achieving returns on its investments?

27
Q

Valuation Ratios show…

A

How does the firm’s performance or financial position relate to its market value?

28
Q

Operating Cycle

A

Average length of time between when a firm originally receives its inventory and when it receives the cash back from selling the product

29
Q

Cash Conversion Cycle

A

Average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of output produced by that inventory

30
Q

Gross Profit Margin

A

ability to translate sales into profit after consideration of cost of products sold

31
Q

Operating Profit Margin

A

ability to translate sales into profit after consideration of operating expenses

32
Q

Net Profit Margin

A

ability to translate sales into profit after consideration of all expenses and revenues including interest, taxes, and non-operating items.

33
Q

A company can increase its ROE with… (2)

A
  • A business strategy by increasing ROA
  • with a financial strategy to increase its use of leverage as long as returns on the incremental investment exceed the cost of borrowing
34
Q

If a firm’s ROE was derived from selling a high margin product or keeping sales expenses low - it was caused by?

A

Net Profit Margins

35
Q

If a firm’s ROE was derived from generating higher sales from a lower investment in assets - it was caused by?

A

Asset Turnover

36
Q

If a firm’s ROE was derived from investing a lower amount of equity, by using more debt in its capital structure - it was caused by?

A

Financial leverage

37
Q

High P/E indicates… (2)

A
  • Firm is highly valued by the market, possibly due to growth exepctatiopens OR
  • Firm has low EPS

ACCT310 (6 decks)

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