Financial Statement Analysis Flashcards
What is Horizontal Analysis?
Horizontal Analysis is the process of comparing two periods of financial statements. E.g. the difference, or percentage difference between 2017 Sales figure and the 2018 Sales figure. Comparing multiple years is often called ‘Trend Analysis’.
What is Vertical Analysis?
Vertical Analysis is the process of comparing an account as a percentage of another account. On the Income Statement you divide each account by Sales Revenue. On the Balance Sheet, youdivide each account by Total Assets.
How do you know if a profitability ratio indicates a business has performed strongly or poorly?
Often ratios on their own don’t provide much information. To determine if a business has performed strongly or poorly, you may look at how the ratio compares to the same business
in prior years (intra-company analysis), how the ratios compare against competitor firm performance (inter-company analysis), or how the ratios compare against industry competitors.
Is a Profit Margin of 3% good or bad? Explain your reasoning.
As per the above answer – it depends on prior years of performance, competitors and industry norms. Additionally you would need to know the business strategy. A 3% profit margin for a company like Aldi or Woolworths might be considered good. A 3% profit margin for a company like Ferrari or Prada is likely to be worse than expected.
What is DuPont analysis? And what is it’s formula
Is an expanded ROE formula
DuPont Analysis=Net Profit Margin×AT×EM
Net Profit Margin= Revenue/Net Income
AT=Asset turnover
Asset Turnover= Average Total Assets/Sales
EM=Equity multiplier
Equity Multiplier= Average Shareholders’ Equity/Average Total Assets
Why is DuPont analysis useful?
DuPont analysis is used to show what is causing the ROE. Is the business generating its ROE from having a good profit margin, from selling lots of products, or from having a lot of leverage (high levels of debt).
Formula for asset turnover
Asset Turnover= Average Total Assets/Sales
Formula for Equity Multiplier
Equity Multiplier= Average Shareholders’ Equity/Average Total Assets
