Financial position analysis Flashcards
What does the financial position of a company show?
It shows the relationship between its assets, liabilities and equity.
The main source is the balance sheet
What are assets?
Assets are resources controlled by the company as a result of past events, from which future economic benefits are expected to flow.
What are liabilities?
Liabilities are present obligations as a result of past events.
Their settlement is expected to result in an outflow of resources.
What is equity?
Equity represents the owner’s interest in the company’s assets after dudcting its liabilities.
What is the balance sheet?
The balance sheet is a formalized representation of the relationship between the assets, liabilities and equity of a company.
What are non-current assets?
Non current assets are assets which have a useful life of more than a year.
It includes land and buildings, equipment etc.
What are current assets?
Current assets are assets which will be consumed/converted into cash in less than a year.
Meaning they have a lifespan of less than a year
How are liabilities grouped?
- Long-term liabilities ( > 1 year)
- Current liabilities ( < 1 year)
What does the horizontal analysis focus on?
Horizontal analysis determines the absolute/relative changes of balance sheet items.
What does vertical analysis focus on?
Vertical analysis evaluates the changes in the structure of assets, liabilities and equity.
What is liquidity analysis?
It measures the ability of a company to remain in business. (verry important)
Precisely, it measures the ability of assets to pay the company’s debts/liabilities.
What is current liquidity?
It shows the capacity of current assets to pay current liabilities.
What is working capital?
It shows the current assets that are permanently availably to the company.
Meaning assets that remain after paying debt
What is solvency analysis?
It reflects the ability to stay in business over the long-term.
What is activity analysis?
It shows how well management uses the company’s resources.
It is a strong indicator of the quality of management
What are some examples of current assets?
- Cash
- Marketable securities (short term investments)
- Accounts receivable
- Inventory
- Prepaid expenses
What are some examples of current liabilities?
- Payables
- Prepayments
- Accruals
- Short-term debts
What does financial autonomy ratio show?
It show the extent to which the business financed its activity from its own sources.
Total sources reflect own and raised sources
What represents the debt ratio?
The debt ratio reflects the extent to which the entity funds its operations from debt. (loans)
What represents the stability ratio?
It shows the investment capacity of the business.
What does the long-term autonomy ratio show?
Shows the financing capacity of the firm using long-term resources.
What does financial debts ratio show?
It shows the indebtedness of the business in financial and banking sources.
What does long-term financial debts ratio show?
It shows the indebtedness of the entity in financial and banking sources on the long term.
What does debt to equity ratio show?
It shows how economic resources of the company are purchased from foreign capital.
What is the quick ratio/acid test?
It is a test to see how well current assets can pay current liabilities (excluding inventories - more strict)
What does the general solvency ratio show?
GSR
It shows the capacity of the company to reimburse at maturity the total debts.
What does general solvendy on a long term ratio show?
GSRL
It shows the businesse’s ability to reimburse the long-term debts from the assets of the entity which remain after payment of current liabilities.
What represents days sales outstanding?
DSO
It represents the average period of collecting receivables
What represents days payables outstanding?
DPO
It represents the average period of paying debts
What does the accounts receivable turnover ratio show?
It shows how quickly a company is collecting its receivables.
What does accounts payable turnover ratio show?
It shows the speed with witch a company pays its suppliers
