Financial statement analysis

Question 1

What are the three ways to compare and analyze financial statements?

Answer 1

1. Operating performance / profitability analysis
2. Liquidity analysis
3. Activity analysis

Question 2

What are the three ways operating / profitability analysis is classified?

Answer 2

1. Profit margin ratio
2. Gross margin ratio
3. EBITDA

Question 3

What is the profit margin ratio equation?

Answer 3

Profit margin ratio = Net income / net sales

Question 4

What does the profit margin calculation mean and what is the goal?

Answer 4

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

Question 5

What is the gross margin ratio equation?

Answer 5

Gross margin ratio = gross profit / net sales

Question 6

What does the gross profit margin calculation mean and what is the goal?

Answer 6

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

Question 7

What is EBITDA and what is the equation to calculate it?

Answer 7

Earning before interest, taxes, depreciation, and amortization. (cash flow of a company)
EBITDA = net income + interest expense + tax expense + depreciation expense + amortization expense

Question 8

What does the EBITDA calculation mean and what is the goal?

Answer 8

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.

Question 9

What does it mean if a company has a negative calculation in the EBITDA?

Answer 9

The business spent more than they brought in. Not necessarily a bad thing

Question 10

What are the three ways Liquidity analysis is classifies?

Answer 10

1. Working capital
2. Current ratio
3. Quick ratio

Question 11

What is the working capital equation?

Answer 11

Working capital = current assets - current liabilities

Question 12

What does the working capital calculation mean and what is the goal?

Answer 12

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

Question 13

What does it mean if the working capital calculation is negative?

Answer 13

The company is in the red

Question 14

What is the current ratio equation

Answer 14

Current ratio = current assets / current liabilities

Question 15

What does the current ratio calculation mean and what is the goal?

Answer 15

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

Question 16

What is the quick ratio equation?

Answer 16

Quick ratio = quick assets / current liabilities

Question 17

What is a quick asset?

Answer 17

The three most liquid assets
Cash + marketable securities (stocks and bonds) + account receivable

Question 18

What does the quick ratio calculation mean and what is the goal?

Answer 18

Quick ratio means a company has $___ of quick assets for every $1 of current liability
The goal is to have a bigger calculation

Question 19

What are the four ways activity analysis can be classified?

Answer 19

1. Receivable turnover
2. Age of accounts receivable
3. Inventory turnover
4. Age of inventory

Question 20

What is the receivable turnover equation?

Answer 20

Receivable turnover = net sales / average accounts receivable (how much is owed to you at any given time)

Question 21

What does the receivable turnover calculation mean and what is the goal?

Answer 21

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)

Question 22

What is the age of accounts receivable equation?

Answer 22

Age of accounts receivable = Days in a year / account receivable turnover

Question 23

What does the age of accounts receivable calculation mean and what is the goal?

Answer 23

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)

Question 24

What it the inventory turnover equation?

Answer 24

Inventory turnover = COGS / average inventory

Question 25

What does the inventory turnover calculation mean and what is the goal?

Answer 25

Inventory turnover means how many times per year did I sell out of average inventory (hypothetical).
The goal is to have a larger number

Question 26

What is the age of inventory equation?

Answer 26

Age of inventory = days in a year / inventory turnover

Question 27

What does the age of inventory calculation mean and what is the goal?

Answer 27

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