Financial statement Analysis

Question 1

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

Answer 1

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.

Question 2

Calculate the horizontal analysis for year over year trend

Answer 2

Percent change between periods

Allows the company to assess financial progress over time

Question 3

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

Answer 3

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

Growth rate of total assets = EB - BB/ BB

Question 4

What order are the financial statements prepared

Answer 4

I/S, changes in equity, BS, SCF

Question 5

Define & Calculate the current ratio

Answer 5

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.

Question 6

Define & Calculate the quick (acid-test) ratio

Answer 6

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.

Question 7

Define & Calculate the cash ratio

Answer 7

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.

Question 8

Define & Calculate the cash flow ratio

Answer 8

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.

Question 9

Define & Calculate net working capital ratio

Answer 9

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.

Question 10

Define and calculate degree of operating leverage (DOL)

Answer 10

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

Question 11

Define and calculate degree of financial leverage (DFL)

Answer 11

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

Question 12

Define and calculate the debt to equity ratio

Answer 12

Debit to equity = total debt / equity

Measures the proportion of total debt to equity

Question 13

Define and calculate long-term debt to equity ratio

Answer 13

LT debt to equity = LT debt / equity

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

Question 14

Define and calculate the debt to total assets ratio

Answer 14

Debt to total assets = total debt / total assets

Measures the proportion of total debt to total assets

Question 15

Calculate the interest coverage ratio

Answer 15

Interest coverage = OI (EBIT) / interest expense

Question 16

Define and calculate fixed charge coverage ratio

Answer 16

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

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

Question 17

Define and calculate interest coverage

Answer 17

Interest coverage = EBIT / internet expense

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

Question 18

Define and calculate cash flow to fixed charges ratio

Answer 18

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

Question 19

Calculate Accounts Receivable Turnover (ARTO)

Answer 19

ARTO = credit sales / avg. gross AR

Question 20

Calculate Inventory Turnover (ITO)

Answer 20

ITO = COGS / Avg. Inventory

Question 21

Calculate Accounts Payable Turnover (APTO)

Answer 21

APTO = Credit Purchases / Avg. AP

Question 22

Calculate Days of sale outstanding in receivables (DSO)

Answer 22

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.

Question 23

Calculate Days sales in inventory (DSI)

Answer 23

1) DSI = 365 / ITO

2) DSI = 365 x avg. Inventory / COGS

Question 24

Calculate day purchases in accounts payable (DPAP)

Answer 24

1) DPAP = 365 / APTO

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

Question 25

Define and calculate the operating cycle

Answer 25

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

Question 26

Define and calculate the cash cycle

Answer 26

Cash cycle is the average number of days to covert inventory into cash from collected receivables Cash cycle = DSI + DSO Or Operating cycles - DPAP

Question 27

Define and calculate total asset turnover

Answer 27

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

Question 28

Define and calculate fixed asset turnover

Answer 28

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

Question 29

Define and calculate all Profitability ratios

Answer 29

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.

Question 30

Define equity assets and return when using ROA and ROE

Answer 30

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.

Question 31

Identify the factors to be considered in measuring income

Answer 31

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

Question 32

Define and calculate Gross Profit Margin Percentage

Answer 32

Gross profit margin % = Gross Profit / Sales Indicates the percentage of sales revenue remaining after deducing COGS . *Note COGS ratio would be 100% - GP margin %

Question 33

Define and calculate Operating Profit Margin Percentage

Answer 33

Operating Profit Margin % = OI / Sales Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense

Question 34

Define and calculate Net Profit Margin

Answer 34

Net income (EBIT) / Sales Indicates the percentage of sales revenue remaining after deducing COGS & Operating Expense, interest and taxes

Question 35

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

Answer 35

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

Question 36

Define and calculate Return on Assets (ROA)

Answer 36

ROA = Net Income / Avg. Total Assets | Ratio of net income to average assets. Measures the profitability in relation to total assets

Question 37

Define and calculate Return on Equity (ROE)

Answer 37

ROE = Net Income / Average Equity Ratio of net income to average equity. Measures the profitability in relation to equity.

Question 38

Define and calculate Market to book ratio

Answer 38

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.

Question 39

Define and calculate Price-earnings ratio

Answer 39

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.

Question 40

Define and Calculate Price to EBITDA ratio

Answer 40

Price to EBITDA ratio = Market Price per Share / EBITDA per Share. Ratio of current stock price to EBITDA

Question 41

Define and Calculate BV per Share

Answer 41

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

Question 42

Identify & Explain the limitations of BV per Share

Answer 42

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

Question 43

Define and Calculate Basic EPS

Answer 43

Basic EPS = Net income - Preferred Dividends / WA Common Shares O/S The income available to common shareholders after preferred dividends have been paid.

Question 44

Define and Calculate Diluted EPS

Answer 44

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

Question 45

Calculate Intermediate BEPS for denominator of Diluted EPS

Answer 45

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

Question 46

Calculate Impact of Convertible Bonds for denominator of Diluted EPS

Answer 46

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

Question 47

Calculate Impact of Convertible Preferred Shares for denominator of Diluted EPS

Answer 47

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).

Question 48

Define and calculate Earnings Yield and Price-earnings Ratio

Answer 48

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

Question 49

Define and calculate Dividend yield

Answer 49

Dividend Yield = Annual Dividend per share / Market Price per share Indicates the % of dividends distributed of the market price

Question 50

Define and calculate Dividend payout ratio

Answer 50

Dividend payout ratio = common dividend / Earnings available to Common Shareholders indicates the % of earnings available to common shareholders paid out as dividends.

Question 51

Define and calculate Shareholder Return

Answer 51

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.

Question 52

Identify the limitations of ratio analysis

Answer 52

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.