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CMA Part 2 > Financial statement Analysis > Flashcards

Financial statement Analysis Flashcards

1
Q

Calculate the percentage of assets and sales (aka vertical analysis)

A

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.

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2
Q

Calculate the horizontal analysis for year over year trend

A

Percent change between periods

Allows the company to assess financial progress over time

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3
Q

Calculate the growth rate of sales and the growth rate of total assets

A

Growth rate of sales = change in sales/ base year sales

Growth rate of total assets = EB - BB/ BB

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4
Q

What order are the financial statements prepared

A

I/S, changes in equity, BS, SCF

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5
Q

Define & Calculate the current ratio

A

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.

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6
Q

Define & Calculate the quick (acid-test) ratio

A

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.

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7
Q

Define & Calculate the cash ratio

A

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.

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8
Q

Define & Calculate the cash flow ratio

A

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.

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9
Q

Define & Calculate net working capital ratio

A

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.

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10
Q

Define and calculate degree of operating leverage (DOL)

A

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

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11
Q

Define and calculate degree of financial leverage (DFL)

A

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

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12
Q

Define and calculate the debt to equity ratio

A

Debit to equity = total debt / equity

Measures the proportion of total debt to equity

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13
Q

Define and calculate long-term debt to equity ratio

A

LT debt to equity = LT debt / equity

Measures the proportion of LT debt )or non current liabilities) to total equity

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14
Q

Define and calculate the debt to total assets ratio

A

Debt to total assets = total debt / total assets

Measures the proportion of total debt to total assets

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15
Q

Calculate the interest coverage ratio

A

Interest coverage = OI (EBIT) / interest expense

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16
Q

Define and calculate fixed charge coverage ratio

A

Fixed charge coverage = Earnings before fixed charges and taxes / fixed charges

Shows the number of times a company’s earnings cover its fixed charges

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17
Q

Define and calculate interest coverage

A

Interest coverage = EBIT / internet expense

The number of times earnings before interest and taxes cover the interest expense

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18
Q

Define and calculate cash flow to fixed charges ratio

A

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

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19
Q

Calculate Accounts Receivable Turnover (ARTO)

A

ARTO = credit sales / avg. gross AR

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20
Q

Calculate Inventory Turnover (ITO)

A

ITO = COGS / Avg. Inventory

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21
Q

Calculate Accounts Payable Turnover (APTO)

A

APTO = Credit Purchases / Avg. AP

22
Q

Calculate Days of sale outstanding in receivables (DSO)

A

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.

23
Q

Calculate Days sales in inventory (DSI)

A

1) DSI = 365 / ITO

2) DSI = 365 x avg. Inventory / COGS

24
Q

Calculate day purchases in accounts payable (DPAP)

A

1) DPAP = 365 / APTO

2) DPAP = 365 x avg. AP / purchases on account

25
Q

Define and calculate the operating cycle

A

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

26
Q

Define and calculate the cash cycle

A

Cash cycle is the average number of days to covert inventory into cash from collected receivables

Cash cycle = DSI + DSO

Or Operating cycles - DPAP

27
Q

Define and calculate total asset turnover

A

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

28
Q

Define and calculate fixed asset turnover

A

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

29
Q

Define and calculate all Profitability ratios

A

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.

30
Q

Define equity assets and return when using ROA and ROE

A

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.

31
Q

Identify the factors to be considered in measuring income

A

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

32
Q

Define and calculate Gross Profit Margin Percentage

A

Gross profit margin % = Gross Profit / Sales

Indicates the percentage of sales revenue remaining after deducing COGS .

*Note COGS ratio would be 100% - GP margin %

33
Q

Define and calculate Operating Profit Margin Percentage

A

Operating Profit Margin % = OI / Sales

Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense

34
Q

Define and calculate Net Profit Margin

A

Net income (EBIT) / Sales

Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense, interest and taxes

35
Q

Define and calculate Earnings Before Interest, Taxes, Deprecation & Amortization (EBITDA) Margin

A

EBITDA Margin = EBITDA / Sales

Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense, interest taxes, depre and amort.

36
Q

Define and calculate Return on Assets (ROA)

A

ROA = Net Income / Avg. Total Assets

Ratio of net income to average assets. Measures the profitability in relation to total assets

37
Q

Define and calculate Return on Equity (ROE)

A

ROE = Net Income / Average Equity

Ratio of net income to average equity. Measures the profitability in relation to equity.

38
Q

Define and calculate Market to book ratio

A

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.

39
Q

Define and calculate Price-earnings ratio

A

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.

40
Q

Define and Calculate Price to EBITDA ratio

A

Price to EBITDA ratio = Market Price per Share / EBITDA per Share.

Ratio of current stock price to EBITDA

41
Q

Define and Calculate BV per Share

A

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

42
Q

Identify & Explain the limitations of BV per Share

A

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

43
Q

Define and Calculate Basic EPS

A

Basic EPS = Net income - Preferred Dividends / WA Common Shares O/S

The income available to common shareholders after preferred dividends have been paid.

44
Q

Define and Calculate Diluted EPS

A

Diluted EPS = Net Income - Preferred Dividends / Diluted WA Common shares O/S

45
Q

Calculate Intermediate BEPS for denominator of Diluted EPS

A

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

46
Q

Calculate Impact of Convertible Bonds for denominator of Diluted EPS

A

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

47
Q

Calculate Impact of Convertible Preferred Shares for denominator of Diluted EPS

A

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).

48
Q

Define and calculate Earnings Yield and Price-earnings Ratio

A

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

49
Q

Define and calculate Dividend yield

A

Dividend Yield = Annual Dividend per share / Market Price per share

Indicates the % of dividends distributed of the market price

50
Q

Define and calculate Dividend payout ratio

A

Dividend payout ratio = common dividend / Earnings available to Common Shareholders

indicates the % of earnings available to common shareholders paid out as dividends.

51
Q

Define and calculate Shareholder Return

A

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.

52
Q

Identify the limitations of ratio analysis

A

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.

CMA Part 2 (3 decks)

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