Financial statement Analysis Flashcards
Calculate the percentage of assets and sales (aka vertical analysis)
Percentage base = Amount of individual line item/ base amount
I.e cash/total assets or cogs/sales
Used to compare competitiveness with other companies as well as compare with prior years internally.
Calculate the horizontal analysis for year over year trend
Percent change between periods
Allows the company to assess financial progress over time
Calculate the growth rate of sales and the growth rate of total assets
Growth rate of sales = change in sales/ base year sales
Growth rate of total assets = EB - BB/ BB
What order are the financial statements prepared
I/S, changes in equity, BS, SCF
Define & Calculate the current ratio
Current assets/current liabilities
Shows the capability of paying current liabilities with current assets
Ratio increases/decreases with assets
Opposite happens with changes in Current Liabilities.
Define & Calculate the quick (acid-test) ratio
Cash + marketable securities + AR/ current liabilities
The ability a company can satisfy short-term debit (without liquidating inventory)
Ratio increases/decreases with assets
Opposite happens with changes in Current Liabilities.
Define & Calculate the cash ratio
Cash + Marketable securities/ current liabilities
The company can settle current obligations with cash and CE
Ratio increases/decreases with with assets and goes the opposite with current liabilities.
Define & Calculate the cash flow ratio
Operating cash flow / current liabilities
Indicates company cash flow of current liabilities
Ratio increases/decreases with all assets & liabilities, except cash which is N/A.
Define & Calculate net working capital ratio
Current assets - current liabilities/ total assets
Working Capital as a percent of total assets
Ratio increases/decreases with with assets and goes the opposite with current liabilities.
Define and calculate degree of operating leverage (DOL)
DOL = CM/OI
DOL for multiple periods = % chg in OI/ %chg in sales
Measures how the company’s operating income responds to changes in sales
Define and calculate degree of financial leverage (DFL)
DFL = OI/ EBT
DFL for multiple periods = % chg in net income/ % chg in OI (for multiple periods)
Measures how net income responds to changes in operating income
Define and calculate the debt to equity ratio
Debit to equity = total debt / equity
Measures the proportion of total debt to equity
Define and calculate long-term debt to equity ratio
LT debt to equity = LT debt / equity
Measures the proportion of LT debt )or non current liabilities) to total equity
Define and calculate the debt to total assets ratio
Debt to total assets = total debt / total assets
Measures the proportion of total debt to total assets
Calculate the interest coverage ratio
Interest coverage = OI (EBIT) / interest expense
Define and calculate fixed charge coverage ratio
Fixed charge coverage = Earnings before fixed charges and taxes / fixed charges
Shows the number of times a company’s earnings cover its fixed charges
Define and calculate interest coverage
Interest coverage = EBIT / internet expense
The number of times earnings before interest and taxes cover the interest expense
Define and calculate cash flow to fixed charges ratio
CF to fixed charges = CF from operations + fixed charges + tax payments / fixed charges
Number of times the operating cash flow, fixed charges and tax payments can cover the company’s fixed charges
Calculate Accounts Receivable Turnover (ARTO)
ARTO = credit sales / avg. gross AR
Calculate Inventory Turnover (ITO)
ITO = COGS / Avg. Inventory
Calculate Accounts Payable Turnover (APTO)
APTO = Credit Purchases / Avg. AP
Calculate Days of sale outstanding in receivables (DSO)
1) DSO = 365 / ARTO
2) DSO = 365 x Avg. AR / credit sales
This ratio is a measure of the liquidity of the company, i.e., the firm’s cash position and its ability to meet its short-term obligations as they come due.
Calculate Days sales in inventory (DSI)
1) DSI = 365 / ITO
2) DSI = 365 x avg. Inventory / COGS
Calculate day purchases in accounts payable (DPAP)
1) DPAP = 365 / APTO
2) DPAP = 365 x avg. AP / purchases on account
Define and calculate the operating cycle
Operating cycle is the average number of days from the purchase or production of inventory until cash is collected from receivables.
Operating Cycle = DSI + DSO
Define and calculate the cash cycle
Cash cycle is the average number of days to covert inventory into cash from collected receivables
Cash cycle = DSI + DSO
Or Operating cycles - DPAP
Define and calculate total asset turnover
Total assets turnover = Sales / Avg. Total Assets
The ratio of sales to the average total assets. This measures the efficiency of the company’s total assets in generating sales or revenue
Define and calculate fixed asset turnover
Fixed asset turn over = sales / Avg net PPE
The ratio of sales to the average property plant and equipment. This measures the efficiency of the company’s fixed assets in generating sales or revenue
Define and calculate all Profitability ratios
GONE RR
GP / sales
OI / Sales
NI / Sales
EBITDA / sales
ROA = NI / Avg total assets ROE = NO / Avg Equity
An examination of an organization costs & revenues to determine its money making operations. Used to anticipate sales and profit opportunity specific to different marketing segments.
Define equity assets and return when using ROA and ROE
Equity is a factor in computing the ROE. May be common equity total equity excluding retained earnings and or total shareholders equity.
Assets is used as the denominator of the ROA. Assets can be total assets employed in operations total assets and other asset variations such as total assets excluding idle assets.
Return is the financial outcome of an undertaking related to the resources invested. Return may be EBIT, EBITDA, NIBT, NI or NI available to Common SH.
Identify the factors to be considered in measuring income
Estimates must approximately reflect the companies future financial performance.
Accounting methods directly affect what happens in the income statement.
Disclosure incentives are requirements influenced by the SEC to disclose financial information to enable users to make informed economic decisions.
The different needs of users including the classification and presentation of different items in the income statement to serve the needs of variety of users
Define and calculate Gross Profit Margin Percentage
Gross profit margin % = Gross Profit / Sales
Indicates the percentage of sales revenue remaining after deducing COGS .
*Note COGS ratio would be 100% - GP margin %
Define and calculate Operating Profit Margin Percentage
Operating Profit Margin % = OI / Sales
Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense
Define and calculate Net Profit Margin
Net income (EBIT) / Sales
Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense, interest and taxes
Define and calculate Earnings Before Interest, Taxes, Deprecation & Amortization (EBITDA) Margin
EBITDA Margin = EBITDA / Sales
Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense, interest taxes, depre and amort.
Define and calculate Return on Assets (ROA)
ROA = Net Income / Avg. Total Assets
Ratio of net income to average assets. Measures the profitability in relation to total assets
Define and calculate Return on Equity (ROE)
ROE = Net Income / Average Equity
Ratio of net income to average equity. Measures the profitability in relation to equity.
Define and calculate Market to book ratio
Market to book ratio = Market price per share / Book value per share
Ratio of current stock price to book. Above 1 indicates appreciation of price and profitability and below 1 indicates future losses.
Define and calculate Price-earnings ratio
Price Earnings Ratio = Market Price per Share / EPS
Ratio of market price to EPS . Higher price indicates company will/is growing, lower price indicates company is declining.
Define and Calculate Price to EBITDA ratio
Price to EBITDA ratio = Market Price per Share / EBITDA per Share.
Ratio of current stock price to EBITDA
Define and Calculate BV per Share
BV per Share = Total Shareholders equity - Preferred Equity / # of Common Shares O/S
The BV per share represents the amount the shareholders will receive if the net assets of the company are liquidated at BV
Identify & Explain the limitations of BV per Share
1) Hx cost & estimates incorporated in the B/S may differ from economical value due to application of GAAP
2) Can’t be used reliably to predict future earnings & market price appreciation in a volatile economic environment.
3) Can be useful only when compared with market prices
Define and Calculate Basic EPS
Basic EPS = Net income - Preferred Dividends / WA Common Shares O/S
The income available to common shareholders after preferred dividends have been paid.
Define and Calculate Diluted EPS
Diluted EPS = Net Income - Preferred Dividends / Diluted WA Common shares O/S
Calculate Intermediate BEPS for denominator of Diluted EPS
Intermediate BEPS ( Options/Warrants most diluted)
Denominator will be
Step 1: Repurchased shares = Proceeds from exercise of option / Average repurchase price
Step 2: Dilutive effect in shares = # of Shares issued from exercise - repurchased shares (from above
Step 3: Intermediate BEPS = NI - Preferred Dividends / Weighted Common Shares O/S + Dilute effect in shares
Calculate Impact of Convertible Bonds for denominator of Diluted EPS
Convertible Bonds ( next diluted)
Interest rate x (1 - tax rate) / Shares to be issued if bonds were converted (Bond price x amt to convert) x shares
Calculate Impact of Convertible Preferred Shares for denominator of Diluted EPS
Convertible Preferred ( least diluted)
Preferred dividends earned ( cumulative) or declared (non cumulative) / Shares to be issued if the preferred shares were converted (Shares x par value x dividend rate).
Define and calculate Earnings Yield and Price-earnings Ratio
Earnings yield = EPS / Market Price per common share
*indicates the % of the market price to one share of common stock
Price earning ratio = Market price per common share / EPS
Define and calculate Dividend yield
Dividend Yield = Annual Dividend per share / Market Price per share
Indicates the % of dividends distributed of the market price
Define and calculate Dividend payout ratio
Dividend payout ratio = common dividend / Earnings available to Common Shareholders
indicates the % of earnings available to common shareholders paid out as dividends.
Define and calculate Shareholder Return
Shareholder Return = Ending Stock price - Beginning Stock Price + Annual Dividend per share / Beginning stock price
Indicates the return from capital appreciation & dividends distributed during the year relative to the stocks beginning market price.
Identify the limitations of ratio analysis
1) Not useful by themselves excepts as a benchmark to prior years, industry or competition performance.
2) Ratios are numerical; too much emphasis on ratios may lead readers to disregard/ignore qualitative aspects of performance measurements.
3) Ratios are affected by seasonal fluctuations, economic and business cycles.
4) Differing accounting principals & applications can lead to a distortion of comparison between companies.
