Financial Statement Analysis Flashcards
Common Size Balance Statement
Expressed as percentage of total assets
Common Size Income Statement
Expresses as a percentage of sales
When are financial ratios useful (3)
- Other firms (peer benchmarking, cross sectional analysis between variation)
- The company’s historical performance (time series analysis) within variation
- Other benchmarking (IRR)
Activity Ratios key q’s
How efficient are the firm’s operation and the firm’s management of asset?
easure how efficiently a firm performs day-to-day tasks, such as the collection of receivables and management of inventory.
Liquidity Ratios key q’s
How well is the firm positioned to meet ST obligation?
Solvency Ratios key q’s
How well is the firm positioned to meet long term obligations?
measure the firm’s ability to meet long-term obligations (“leverage ratios”, “long-term debt ratios”)
Profitability Ratios key q’s
How and how much is the firm achieving returns on its investments?
measure the firm’s ability to generate profit from its resources (assets)
Valuation Ratios key q’s
How does the firm’s performance or financial position relate to its market value?
Solvency: debt and coverage ratios
Debt ratios: tell us about the capital structure of the firm. Lower debt ratios imply less risk because of a lower fixed to variable cost ratio.
Coverage ratios: indicate how many times we can cover interest related to debt. It is key for lending institutions to assess if a borrower will be able to meet current and future obligations.
Drawbacks of accounting-based comparisons and mitigants
Different growth strategies
different value-added strategies
Financed differently
different accounting methods
Chose similar companies, clustering analysis with industries, choose ratios not affected
Drawbacks of accounting-based comparisons and mitigants
Different growth strategies
different value-added strategies
Financed differently
different accounting methods
Chose similar companies, clustering analysis with industries, choose ratios not affected
Operating Profit Margin
Earnings before interest and tax expense (EBIT) / sales
Revenue to NI
revenue cogs =Gross profit -SGA other operating income and expenses net =EBIT interest expense and income =EBT tax expense NI
Capital Employed
=Equity + Debt
=Fixed assets + current assets - operating liabilities
=Total assets - current liabilities
clean surplus identity
Beginning book value of equity + Net income - dividends + (new issues?)
or
Et = E(t-1) + REt
Return of Capital Employed (ROCE)
Dupont
=EBIT / Capital employed =EBIT + financial income / CE Dupont = operating Profit margin x Capital employed Turnover (EBIE/Sales) * (Sales/Capital Employed) Profitability Ratio
Growth relationship for equity
Profitability Ratio
change in Equity / Equity
g = ROE - DIV/E + New issue/ E
Return on Equity
=Growth rate + DIV/E - New Issue/Equity
=Net income / average Equity
Profitability Ratio
Gross Margin
Gross Profit/Sales
Measures ability to translate sales into profit after taking into account COGS
Profitability Ratio
Operating margin
Operating profit (ebit)/sales Measures ability to sales into profit after considering operating expenses Profitability Ratio
Net Profit Margin (return on sales)
Net Profit /Sales
Measures ability to translate sales to profit after considering all revenues and expenses
ROA: Return on assets
=EBIT/Average Assets
=Net Income + Interest exp x (1-tax rate) / Average Assets
