Financial Analysis Techniques Flashcards
Financial Analysis Tools (4)
- Graphs
- Regression
- Common Size Analysis
- Financial Ratio Analysis
Graphs (2)
- Comparison of performance and financial structure over time
- Visual overview of risk trends in business
Pie charts are most useful to communicate…
Composition of total value
Line graphs are useful when… (2)
focused on change for a
*limited number of items
*over a relatively longer period of time
Stacked column graph is useful… (3)
to show both
*composition
*amounts
*change over time
Regression Formula =
y = slope coeff. x + constant
Slope coeff. represents…
when x changes, y will change proportionally by the amount of the slope coeff.
Common-size analysis
expresses financial data in relation to a single financial statement item or base
Vertical Common Size highlights…
composition and identifies what’s important in the form of percentages of the largest amount
B/S Vertical Common Size
Each item as a percentage of total assets
I/S Vertical Common Size
Each item as a percentage of total revenue
C/F Vertical Common Size
Each line as a percentage of sales, assets or total in and out
Horizontal Common Size highlights…
Items that have changed unexpectedly or have unexpectedly remained unchanged
Horizontal Common Size shows…
percentage increase or decrease of each item from the prior year or relative to a base year
Cross-sectional common size analysis compares…
One metric for one company with the same metric for another company or group of companies - time period is fixed
Trend common size analysis compares…
across periods of time between 3-10 years (longer time period)
Ratios (4)
*express one number in relation to another
* standardise financial data in terms of mathematical relationships
* facilitate comparisons - trends and across companies
* are interrelated
Ratios are not an answers, they are an…
indicator
Interpretation generally involves…
comparison
Analysis will address the question of…
why?
Financial ratios can provide insights into… (5)
- Microeconomic environments
- company’s financial flexibility
- managements ability
- changes in company or industry over time
- comparability with competitors
Limitations to ratio analysis… (3)
*Results may be inconsistent
*The need to use judgement
*The use of alternative accounting methods
Activity Ratios show…
Asset utilisation - how efficient the firm’s operations and the firm’s management of assets?
Liquidity Ratios show…
How well is the firm positioned to meet its short-term obligations?
Solvency Ratios show..
How well is the firm positioned to meet long-term obligations?
Profitability Ratios show…
How and how much is the firm achieving returns on its investments?
Valuation Ratios show…
How does the firm’s performance or financial position relate to its market value?
Operating Cycle
Average length of time between when a firm originally receives its inventory and when it receives the cash back from selling the product
Cash Conversion Cycle
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
Gross Profit Margin
ability to translate sales into profit after consideration of cost of products sold
Operating Profit Margin
ability to translate sales into profit after consideration of operating expenses
Net Profit Margin
ability to translate sales into profit after consideration of all expenses and revenues including interest, taxes, and non-operating items.
A company can increase its ROE with… (2)
- 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
If a firm’s ROE was derived from selling a high margin product or keeping sales expenses low - it was caused by?
Net Profit Margins
If a firm’s ROE was derived from generating higher sales from a lower investment in assets - it was caused by?
Asset Turnover
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?
Financial leverage
High P/E indicates… (2)
- Firm is highly valued by the market, possibly due to growth exepctatiopens OR
- Firm has low EPS
