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CFA Level 1 > Financial Reporting & Analysis - Analysis Techniques > Flashcards

Financial Reporting & Analysis - Analysis Techniques Flashcards

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CFA flashcards
1
Q

Ratio: ROE

A

Net income / shareholder’s equity

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2
Q

Limitation of ratios (4)

A
  1. Comparability across industries,
  2. Determine whether results of ratio analysis are consistent,
  3. Need to use judgement and
  4. Use of alternative accounting methods.
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3
Q

Define: vertical balance sheet analysis

A

Each item on the balance sheet divided by total assets

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4
Q

Define: horizontal balance sheet analysis

A

% change in each item from period-to-period

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5
Q

Define: vertical income statement

A

% of revenue (sometimes % of assets for financial institutions)

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6
Q

Trend analysis techniques (2)

A
  1. Set year 1 as an index value and show the next years as a ratio of year one (1 to 1.2 to 1.3 = 30% increase from base year), or
  2. Show % change from previous year
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7
Q

Define: activity ratios

A

How effectively company performs day to day tasks like managing inventory, collecting receivables, etc.

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8
Q

Define: liquidity ratios

A

Ability to meet short-term obligations

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9
Q

Define: solvency ratios

A

Ability to meet long-term obligations

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10
Q

Define: profitability ratios

A

Ability to generate profits from current resources (e.g. assets)

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11
Q

Define: valuation ratios

A

Typically the quantity of assets divided by the flow associated with the ownership of those assets (i.e. price divided by earnings for PE)

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12
Q

Interpreting ratios (2)

A
  1. Analyze ratios from a trend and benchmark perspective, understanding why ratios diverge
  2. Evaluate based on: company goals, industry norms and economic conditions
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13
Q

Ratio: inventory turnover (a)

A
  1. Cost of goods sold / average inventory

2. Heart of operations, # of times turned over in a period

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14
Q

Ratio: days of inventory on hand (DOH) (a)

A
  1. # of days in period / inventory turnover

2. How long it takes to turnover inventory. Lower is good

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15
Q

Ratio: receivable turnover (a)

A
  1. Revenue / average receivables
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16
Q

Ratio: days of sales outstanding (DOS) (a)

A
  1. # of days in period / receivables turnover

2. # of days to collect receivables. A high number could indicate poor credit quality standards.

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17
Q

Ratio: payables turnover (a)

A
  1. Purchases / average trade payables

2. How many times per year all creditors are paid

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18
Q

Ratio: days of payables (a)

A
  1. # of days in period / payables turnover

2. # of days to pay payables. Long time could reflect inability to pay, or taking advantage of credit facilities.

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19
Q

Ratio: working capital turnover (a)

A
  1. Revenue / average working capital

2. How efficiently revenue is generated with working capital. 4 = $4 of revenue for $1 working capital

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20
Q

Ratio: fixed asset turnover (a)

A
  1. Revenue / average net fixed assets
  2. Efficiency of fixed assets. New assets (not depreciated yet) will make this # worse. YOY may not be that helpful because fixed assets are not always linear.
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21
Q

Ratio: total asset turnover (a)

A
  1. Revenue / average total assets
  2. Could indicate efficiency, but also strategic decisions like capital vs labor intensity. 1.2 = $1.2 revenue for each $1 of assets.
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22
Q

Define: liquidity ratios

A
  1. Measures how quickly assets are turned into cash & ability to meet short-term needs,
  2. Liquidity achieved through efficient use of assets,
  3. Larger companies have more avenues for liquidity & thus usually require smaller capital buffers,
  4. Contingent liabilities should be included (especially for banks) because they will be triggered when overall liquidity decreases.
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23
Q

Ratio: current (L)

A

Current assets / current liabilities

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24
Q

Ratio: quick (acid) (L)

A

(Cash + short-term marketable securities + receivables) / current liabilities

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25
Q

Ratio: cash (L)

A
  1. (Cash + short-term marketable securities) / current liabilities
  2. Crisis cash measure
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26
Q

Ratio: defensive interval (L)

A
  1. (Cash + short-term marketable securities + receivables) / daily cash expenditure
  2. Burn rate, i.e. number of days survive
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27
Q

Ratio: cash conversion cycle (L)

A
  1. DOH + DSO - # of days of payables
  2. Measures period of time from when comp invests in working capital until it collets cash.
  3. Shorter = more liquidity, less financing of inventory and shorter credit collection.
28
Q

Define: operating leverage

A

Higher fixed costs & lower variable costs = more operating leverage. As sales increase, margin should increase.

29
Q

Define: financial leverage

A

More debt in the capital structure. Leverage can increase returns to shareholder’s but also increase risk of default.

30
Q

Ratio: debt-to-assets (S)

A

Total debt / total assets

31
Q

Ratio: debt-to-capital (S)

A

Total debt / (total debt + total shareholder’s equity)

32
Q

Ratio: debt to equity (S)

A

Total debt / total shareholder’s equity

33
Q

Ratio: interest coverage (S)

A

EBIT / interest payments

34
Q

Ratio: fixed charge coverage

A

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

35
Q

Define: profitability ratios

A

Ability to generate a profit is key, so this is the focus of most equity analysts

36
Q

Ratio: gross profit margin (P)

A
  1. gross profit / revenue
  2. % of revenue to cover expenses.
  3. Higher shows either higher product pricing or lower costs.
37
Q

Ratio: operating profit margin (P)

A
  1. operating income / revenue

2. Change relative to gross profit can indicate ability (inability) to control overhead and operating costs

38
Q

Ratio: pre-tax margin (P)

A

EBT / revenue

39
Q

Ratio: net profit margin (P)

A
  1. net income / revenue

2. Net of all expenses. Analysts will generally adjust for non-recurring items to project forward.

40
Q

Ratio: operating ROA (P)

A

Operating income / average total assets

41
Q

Ratio: ROA (P)

A
  1. Net income / average total assets

2. Some analysts use other formats to account for interest expenses, etc. Just need to be consistent.

42
Q

Ratio: return on capital (P)

A

EBIT / (short-term + long-term debt & equity)

43
Q

Ratio: ROE (P)

A

Net income / average total equity

44
Q

Ratio: Return on common equity (P)

A

(Net income - preferred dividends) / average common equity

45
Q

DuPont Analysis (simple)

A
  1. ROE = ROA * Leverage

2. As long as company can earn more than cost of leverage, it is a good use of leverage

46
Q

DuPont Analysis (expanded)

A

ROE + tax burden interest burden EBIT margin total asset turnover leverage

47
Q

Steps of equity analysis (5)

A
  1. Understanding business & current financial profile,
  2. Forecasting company performance,
  3. Selecting appropriate valuation model,
  4. Converting forecasts to a valuation,
  5. Making the investment decision
48
Q

Ratio: P/E (V)

A

Price per share / earnings per share

49
Q

Ratio: P/CF (V)

A

Price per share / cash flow per share

50
Q

Ratio: P/S (V)

A

Price per share / sales per share

51
Q

Ratio: P/BV (V)

A

Price per share / book value per share

52
Q

Basic EPS

A

(Net income - preferred dividends) / weighted average # of ordinary shares outstanding

53
Q

Ratio: Cash flow per share

A

Cash flow from operations / weighted average # of outstanding shares

54
Q

Ratio: EBITDA per share

A

EBITDA / weighted average # of shares outstanding

55
Q

Ratio: Dividends per share

A

Common dividends declared / weighted average # of ordinary shares outstanding

56
Q

Ratio: Dividend payout

A

Common share dividends / net income attributable to common stock

57
Q

Ratio: Retention Rate

A

(Net income attributable to common stock - common stock dividends) / net income attributable to common stock

58
Q

Ratio: sustainable growth

A

Retention rate * ROE

59
Q

Define: credit risk

A

Risk of loss caused by debtor’s failure to make a payment

60
Q

Define: business risks (4)

A
  1. Operating environment,
  2. Industry characteristics,
  3. Success factors & areas of vulnerability,
  4. Competitive position (size & diversification)
61
Q

Define: Segment (IFRS)

A
  1. Engages in activities that may create revenue & expenses (even if they don’t yet),
  2. Whose results are regularly reviewed by senior mgmt,
  3. Discrete financial information is available
62
Q

Reporting requirements - segments

A
  1. Must report independent data for each segment that represents 10% or more of total segments, and
  2. Must report up to 75% of total
63
Q

Ratio: segment margin

A

Profit or loss / revenue

64
Q

Ratio: segment turnover

A

Revenue / assets

65
Q

Ratio: segment ROA

A

Profit or loss / assets

66
Q

Ratio:segment debt ratio

A

Liabilities / assets

CFA Level 1 (6 decks)

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