Financial Statement Analysis Flashcards
How do we calculate Total Assets?
Total Liabilities + Total Shareholder’s Equity
(We take Total liabilities from Total assets first because debt has priority over shareholders)
What are the two types of loans that banks provide to companies?
Term loans and credit lines (revolving credit)
How does a credit line work?
The firm agrees a set loan with the bank (i.e. 10mill) that they can draw out in increments (1,2,3mill)
Once this has been agreed, the bank sets certain criteria for the money (financial covenants)
Level of cash flow is an important covenant (if cash flow falls below a certain level, they can cut the credit line supply)
How do we draw a balance sheet?
Assets on the left, liabilities on the right
Non-current assets and liabilities on the top, Current on the bottom
Total liabilities THEN Total equity (=Total assets - total liabilities)
What is current vs non-current?
For Assets and Liabilities?
Current liabilities need to be repaid within a year
Current assets are assets which can be liquidated within a year
How do we calculate liquidity?
Current assets/current liabilities
Why do we not want a liquidity which is too high?
- Current assets may perish and not be worth anything tomorrow
- Time value of money makes assets you hold today without investment lower than tomorrow (current assets have lower rates of return than non-current assets)
What is the International Financial Reporting Standards (IFRS)?
The rule firms follow to “value assets at theoretically true market or fair values. Market or fair value is the price at which willing buyers and sellers would trade the assets.”
What does the Balance Sheet do?
What does the income statement do?
Measures performance over a specific period
Shows the amount of profits generated by a firm over a given time period
Important for existing and potential shareholders
Also called P+L statement
How do we draw an income statement?
Rev - Op Expenses = Op Profit
Add Income from Investments = EBIT
Minus Finance Costs (interest) = Profit before Tax
Minus Tax = Profit after Tax
Divide Number of shares = Earnings per share
How do we draw an income statement relating to COGS?
What is amortisation?
Where we spread the cost of an asset over its expected lifespan rather than all at once
How do we calculate average tax rate?
Divide the tax bill by the taxable income
What is the marginal tax rate?
The tax (%) you pay if you earn one more unit of currency
The tax band you earn in essentially
How do we calculate Net Cash Flow?
Cash Flow from Operating Activities (CFO)
Plus: Cash Flow from Investing Activities (CFI)
Plus: Cash Flow from Financing Activities (CFF)
NCF = CFO + CFI + CFF
How do we draw a Cash Flow Statement?
What is the short-term solvency, or liquidity, ratios?
Measures the company’s ability to pay its short-term bill by using its current assets
Three ratios measure this:
Current ratio – Current assets/Current Liabilities
Quick Ratio – Current Assets-Inventory/Current Liabilities (because inventory is relatively illiquid compared to cash)
Cash ratio – Cash and cash equivalents/Current Liabilities (this is for a very short term solution)
What is the long-term solvency, or financial leverage, ratios?
They provide info about a company’s long-run ability to meet it obligations
Three measures:
Total debt ratio – Total Assets-Total Equity/Total Assets (tells us how much debt a company uses per every £1)
Times interest earned ratio – EBIT/Interest (measures how well a company has its interest obligations covered)
Cash coverage ratio – 𝑬𝑩𝑰𝑻+𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏/𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕
What is the asset management, or turnover, ratios?
Show how effectively or intensively a firm uses its assets to generate sales
Inventory turnover – COGS/inventory (tells us how many times in year the company turnsover its inventory)
Days’ sales in inventory – 365days/Inventory turnover (tells us how many days inventory waits on average to be sold)
Receivables Turnover – Revenues/Trade receivables (how many times a company collects outstanding credit and loans it again in a year)
Days’ sales in receivables – 365days/Receivables turnover (how long it takes to collect on its credit sales)
Total asset turnover – Revenues/Total assets (how much the company generated in sales per assets)
What are profitability measures?
What are the market value measures?
