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CFA Level 1 - Quantitative Methods > Financial Analysis Techniques > Flashcards

Financial Analysis Techniques Flashcards

1
Q

Ratio Analysis

A

Express relationships among data that can be used for internal comparison across firms

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2
Q

Limitations of Ratios

A
  • Financial ratios are not useful when viewed in isolation
  • Comparisons with other companies can be difficult when companies use different accounting methods
  • When companies operate in multiple industries, it is difficult to find a ratio that is comparable between industries
  • Conclusions cannot be made using a single ratio
  • Determining the target value of comparison for a ratio is difficult
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3
Q

Common size statements

A

normalize balance sheets and income statements and allow the analyst to more easily compare performance across firms and for a single firm over time.

  • vertical - expresses all BS accounts as a percentage of total assets
  • horizontal - expresses all IS items as a percentage of sales.
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4
Q

Vertical common-size income statement ratios

A

Income statement account / sales

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5
Q

Horizontal common-size balance sheet ratios

A

balance sheet account / total assets

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6
Q

Activity Ratios

A

Asset utilization or turnover ratios. They give indications of how well a firm utilizes various assets such as inventory and fixed assets

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7
Q

Liquidity ratios

A

Look at the ability to pay ST obligations as they come due

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8
Q

Solvency ratios

A

gives the analyst information on the firm’s financial leverage and ability to meet its longer-term obligations.

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9
Q

Profitability ratios

A

provide information on how well a company generates operating profits and net profits from its sales.

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10
Q

Valuation ratios

A

Compare the relative valuation of companies,

i.e. sales per share, earnings per share, and price to cash flow.

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11
Q

Receivables Turnover

A

= annual sales / average receivables

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12
Q

Days of sales outstanding

A

=365 / receivables turnover

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13
Q

Inventory Turnover

A

= COGS / Average Inventory

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14
Q

Days of Inventory on Hand

A

=365 / inventory turnover

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15
Q

Payables Turnover

A

=Purchases / average trade payables

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16
Q

Number of Days Payable

A

365 / payables turnover ratio

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17
Q

Total Asset Turnover

A

= revenue / average total assets

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18
Q

Fixed Asset Turnover

A

= revenue / average net fixed assets

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19
Q

Working Capital Turnover

A

=revenue / average working capital

  • working capital = current assets -current liabilities
    How the firm is using working capital in terms of dollars of sales per dollar of working capital.
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20
Q

Current Ratio

A

= Current Assets / Current Liabilities

21
Q

Quick Ratio

A

= (Cash + marketable securities + receivables) / current liabilities

  • Does not include inventories and other assets that are not as liquid
22
Q

Cash Ratio

A

=(Cash + marketable securities) / current liabilities

23
Q

Defensive Interval ratio

A
  • indicates the number of days of average cash expenditures the firm could pay with its current liquid assets.
    = (cash + marketable securities + receivables) / average daily expenses

– here expenses are SG&A, COGS, and R&D

24
Q

Cash Conversion Cycle

A

The length of time it takes to turn the firm’s cash investment in inventory back into cash.

= days of sales outstanding + days of inventory on hand - number of days payable

25
Q

Debt-to-equity ratio

A

= total debt / total shareholders’ equity

26
Q

Debt-to-Capital ratio

A

= total debt / (total debt + total shareholders’ equity)

27
Q

Debt-to-assets

A

= total debt / total assets

28
Q

Financial Leverage

A

= average total assets / average total equity

29
Q

Interest Coverage

A

= EBIT / interest payments

30
Q

Fixed Charge Coverage

A

= (EBIT + lease payments) / (interest payments + lease payments)

31
Q

Net Profit Margin

A

= net income / revenue

32
Q

Gross Profits

A

= net sales - COGS

33
Q

Operating Profits

A

EBIT

34
Q

Net Income

A

Earnings after Taxes (EAT), but before dividends

35
Q

Total Capital

A

LT debt + ST debt + Common and preferred equity

36
Q

Total Capital

A

Total Assets

37
Q

Gross Profit Margin

A

Gross Profit / Revenue

38
Q

Operating Profit Margin

A

Operating Income / Revenue
OR
EBIT / Revenue

39
Q

Pretax Margin

A

= EBT / Revenue

40
Q

Return on Assets (ROA)

A

= net income / average total assets

= (net income + interest expense(1 - tax rate))/ average total assets

41
Q

Operating Return on Assets

A

Operating Income / average total assets

42
Q

Return of Total Capital (ROTC)

A

= EBIT / average total capital

43
Q

Return on Equity (ROE)

A

Net income / average total equity

44
Q

Return on Common Equity

A

= (net income - preferred dividends) / average common equity

= net income available to common / average common equity

45
Q

DuPont system of analysis

A

ROE = (Net income / Revenue)(Revenue/Avg. Total Assets)( Average Total Assets/Equity)
= Net Profit Margin * Asset Turnover * Leverage Ratio

  • A way to decompose ROE, and see what is changes are driving change in ROE
46
Q

Extended DuPont Analysis System

A

ROE = (net income / EBT) (EBT/EBIT)(EBIT/Revenue)(revenue/avg. assets)(average assets / average equity)
= (tax burden)(interest burden)(EBIT margin)(asset turnover)(financial leverage)

47
Q

Sustainable growth rate (g)

A

= RR * ROE

RR = retention rate
ROE = Return on Equity
48
Q

Retention Rate (RR)

A

= (net income available to common - dividends declared)/(net income available to common)
= 1 - dividend payout ratio

49
Q

Dividend Payout Ratio

A

= dividends declared / net income available to common

CFA Level 1 - Quantitative Methods (29 decks)

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