Financial Analysis Techniques Flashcards

1
Q

Ratio Analysis

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Vertical common-size income statement ratios

A

Income statement account / sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Horizontal common-size balance sheet ratios

A

balance sheet account / total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Liquidity ratios

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Solvency ratios

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Profitability ratios

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Valuation ratios

A

Compare the relative valuation of companies,

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Receivables Turnover

A

= annual sales / average receivables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Days of sales outstanding

A

=365 / receivables turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Inventory Turnover

A

= COGS / Average Inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Days of Inventory on Hand

A

=365 / inventory turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Payables Turnover

A

=Purchases / average trade payables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Number of Days Payable

A

365 / payables turnover ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Total Asset Turnover

A

= revenue / average total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Fixed Asset Turnover

A

= revenue / average net fixed assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
Debt-to-equity ratio
= total debt / total shareholders' equity
26
Debt-to-Capital ratio
= total debt / (total debt + total shareholders' equity)
27
Debt-to-assets
= total debt / total assets
28
Financial Leverage
= average total assets / average total equity
29
Interest Coverage
= EBIT / interest payments
30
Fixed Charge Coverage
= (EBIT + lease payments) / (interest payments + lease payments)
31
Net Profit Margin
= net income / revenue
32
Gross Profits
= net sales - COGS
33
Operating Profits
EBIT
34
Net Income
Earnings after Taxes (EAT), but before dividends
35
Total Capital
LT debt + ST debt + Common and preferred equity
36
Total Capital
Total Assets
37
Gross Profit Margin
Gross Profit / Revenue
38
Operating Profit Margin
Operating Income / Revenue OR EBIT / Revenue
39
Pretax Margin
= EBT / Revenue
40
Return on Assets (ROA)
= net income / average total assets | = (net income + interest expense(1 - tax rate))/ average total assets
41
Operating Return on Assets
Operating Income / average total assets
42
Return of Total Capital (ROTC)
= EBIT / average total capital
43
Return on Equity (ROE)
Net income / average total equity
44
Return on Common Equity
= (net income - preferred dividends) / average common equity | = net income available to common / average common equity
45
DuPont system of analysis
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
Extended DuPont Analysis System
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
Sustainable growth rate (g)
= RR * ROE ``` RR = retention rate ROE = Return on Equity ```
48
Retention Rate (RR)
= (net income available to common - dividends declared)/(net income available to common) = 1 - dividend payout ratio
49
Dividend Payout Ratio
= dividends declared / net income available to common