Financial statement analysis Flashcards
What are the three ways to compare and analyze financial statements?
- Operating performance / profitability analysis
- Liquidity analysis
- Activity analysis
What are the three ways operating / profitability analysis is classified?
- Profit margin ratio
- Gross margin ratio
- EBITDA
What is the profit margin ratio equation?
Profit margin ratio = Net income / net sales
What does the profit margin calculation mean and what is the goal?
Profit margin ratio means what percentage of sales goes into net income.
The goal is to have a bigger number. The larger the number, the more effective a company is at managing expenses
What is the gross margin ratio equation?
Gross margin ratio = gross profit / net sales
What does the gross profit margin calculation mean and what is the goal?
Gross profit margin is what percentage of total sales does gross profit account for.
The goal is to have a bigger number. The bigger the number, the more sales that are taking place (generally). Different companies can have different product markups that can effect gross profit
What is EBITDA and what is the equation to calculate it?
Earning before interest, taxes, depreciation, and amortization. (cash flow of a company)
EBITDA = net income + interest expense + tax expense + depreciation expense + amortization expense
What does the EBITDA calculation mean and what is the goal?
EBITDA looks at cash flow.
The goal is to have a bigger number. The larger the calculation, the more cash a business had coming in.
What does it mean if a company has a negative calculation in the EBITDA?
The business spent more than they brought in. Not necessarily a bad thing
What are the three ways Liquidity analysis is classifies?
- Working capital
- Current ratio
- Quick ratio
What is the working capital equation?
Working capital = current assets - current liabilities
What does the working capital calculation mean and what is the goal?
Working capital means clearing debts.
The goal is to have a larger calculation. The bigger the number, the easier a company can settle their debts. The company is more liquid
What does it mean if the working capital calculation is negative?
The company is in the red
What is the current ratio equation
Current ratio = current assets / current liabilities
What does the current ratio calculation mean and what is the goal?
The current ratio calculation means for every $___ of current assets a company has, they have $1 in current liabilities
The goal is to have a larger number. The bigger the number the more liquid a company is and they can pay off their debts
What is the quick ratio equation?
Quick ratio = quick assets / current liabilities
What is a quick asset?
The three most liquid assets
Cash + marketable securities (stocks and bonds) + account receivable
What does the quick ratio calculation mean and what is the goal?
Quick ratio means a company has $___ of quick assets for every $1 of current liability
The goal is to have a bigger calculation
What are the four ways activity analysis can be classified?
- Receivable turnover
- Age of accounts receivable
- Inventory turnover
- Age of inventory
What is the receivable turnover equation?
Receivable turnover = net sales / average accounts receivable (how much is owed to you at any given time)
What does the receivable turnover calculation mean and what is the goal?
The receivable turnover calculation means how many times per year did you collect the average amount owed to you.
The goal is to have a larger number. A larger number in receivable turnover will give a smaller number in age of account receivable (which is good)
What is the age of accounts receivable equation?
Age of accounts receivable = Days in a year / account receivable turnover
What does the age of accounts receivable calculation mean and what is the goal?
Age of accounts receivable means how many days does it take someone to pay money they owe.
The goal is to have a smaller number (ideally 0)
What it the inventory turnover equation?
Inventory turnover = COGS / average inventory
What does the inventory turnover calculation mean and what is the goal?
Inventory turnover means how many times per year did I sell out of average inventory (hypothetical).
The goal is to have a larger number
What is the age of inventory equation?
Age of inventory = days in a year / inventory turnover
What does the age of inventory calculation mean and what is the goal?
Age of inventory means how many days was an average piece of inventory on hand before being sold.
The goal is to have a smaller number. A smaller number indicates quick sales and more sales revenue throughout the year
