Financial Analysis Techniques Flashcards
Ratio Analysis
Express relationships among data that can be used for internal comparison across firms
Limitations of Ratios
- 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
Common size statements
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.
Vertical common-size income statement ratios
Income statement account / sales
Horizontal common-size balance sheet ratios
balance sheet account / total assets
Activity Ratios
Asset utilization or turnover ratios. They give indications of how well a firm utilizes various assets such as inventory and fixed assets
Liquidity ratios
Look at the ability to pay ST obligations as they come due
Solvency ratios
gives the analyst information on the firm’s financial leverage and ability to meet its longer-term obligations.
Profitability ratios
provide information on how well a company generates operating profits and net profits from its sales.
Valuation ratios
Compare the relative valuation of companies,
i.e. sales per share, earnings per share, and price to cash flow.
Receivables Turnover
= annual sales / average receivables
Days of sales outstanding
=365 / receivables turnover
Inventory Turnover
= COGS / Average Inventory
Days of Inventory on Hand
=365 / inventory turnover
Payables Turnover
=Purchases / average trade payables
Number of Days Payable
365 / payables turnover ratio
Total Asset Turnover
= revenue / average total assets
Fixed Asset Turnover
= revenue / average net fixed assets
Working Capital Turnover
=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.
Current Ratio
= Current Assets / Current Liabilities
Quick Ratio
= (Cash + marketable securities + receivables) / current liabilities
- Does not include inventories and other assets that are not as liquid
Cash Ratio
=(Cash + marketable securities) / current liabilities
Defensive Interval ratio
- 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
Cash Conversion Cycle
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
Debt-to-equity ratio
= total debt / total shareholders’ equity
Debt-to-Capital ratio
= total debt / (total debt + total shareholders’ equity)
Debt-to-assets
= total debt / total assets
Financial Leverage
= average total assets / average total equity
Interest Coverage
= EBIT / interest payments
Fixed Charge Coverage
= (EBIT + lease payments) / (interest payments + lease payments)
Net Profit Margin
= net income / revenue
Gross Profits
= net sales - COGS
Operating Profits
EBIT
Net Income
Earnings after Taxes (EAT), but before dividends
Total Capital
LT debt + ST debt + Common and preferred equity
Total Capital
Total Assets
Gross Profit Margin
Gross Profit / Revenue
Operating Profit Margin
Operating Income / Revenue
OR
EBIT / Revenue
Pretax Margin
= EBT / Revenue
Return on Assets (ROA)
= net income / average total assets
= (net income + interest expense(1 - tax rate))/ average total assets
Operating Return on Assets
Operating Income / average total assets
Return of Total Capital (ROTC)
= EBIT / average total capital
Return on Equity (ROE)
Net income / average total equity
Return on Common Equity
= (net income - preferred dividends) / average common equity
= net income available to common / average common equity
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
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)
Sustainable growth rate (g)
= RR * ROE
RR = retention rate ROE = Return on Equity
Retention Rate (RR)
= (net income available to common - dividends declared)/(net income available to common)
= 1 - dividend payout ratio
Dividend Payout Ratio
= dividends declared / net income available to common
