Financial Statement Analysis Flashcards
what is ratio analysis?
relationship among various account balances
what are the benefits of ratio analysis?
-removes the size effect to allow comparisons of firms of different sizes or firms over time
-allows one to investigate the relationships between financial figures, often there is more information in the relationship between figures than in an individual figure
Gaap limitations of ratio analysis
non- captialized csots- related to the concept of measurability is the expensing of costs relating to assets that cannot be identified with enough precisions to warrant capitalization
-ex: brand equity costs from advertising or other promotional activities and research and development costs relating to future products
-historical cost - assets and liabilities are usually recorded at original acquisition or issuance costs. subsequent increases in value are not recorded at original acquisition or issuance costs. Subsequent increases in value are not recorded until realized and declines are only recognized if deem premanent
what do profitabilitiy ratios tell you?
tell you how much earnings a company generates from operations
what does Return on Assets(ROA) do?
Measures the return generated by companies assets
ROA formula
Net income/ average total assets
what does Profit Margin (PM) tell you?
how much profit the company earns from each sales dollar
PM formula
net income/ sales revenue
What does Asset Turnover (AT) tell you?
measures productivity of the companies assets
Asset turnover (AT) formula
Sales Revenue/avg total assets
ROA Big picture
ROA = Profit Margin * Asset Turnover
ROA = NI/ avg total assets = (PM) ni/sr * (AT) sr/ avg total assets
What does Return on Equity(ROE) tell you?
measures the profit generated from the resources that owners provide
ROE formula
Net Income / avg shareholders equity
ROE Big picture
ROE = PM * AT* Equity multiplier
roe = ni/sr (PM) * SR/avg total assets (AT) * avg total assets / avg equity (EQUITY MULTIPLIER)
What do liquidity Ratios tell you?
what is the ability of the company to meet it’s short-term obligations
What is liquidity?
Liquidity refers to cash - how much you have, how much is expected and how much can be raised on short notice
Current assets/ liabilities
convert to cash or pay off within the next year
net working capital or working capital
an excess of current assets over current liabilities (current assets - current liabilities)
Working capital formula
current assets - current liabilities
Current ratio
current assets / current liabilities
Quick ratio
cash + marketable securities + a/R/ current liabilities
What does a solvency/Leverage ratio tell you?
what is the ability of the company to pay its longterm obligations?
What is solvency?
a companies ability to meet its debt obligations
What is leverage?
describes how a company is financed
Debt-To-Equity ratio formula
Total Liabilities / Shareholders Equity
What can you learn from receivables turnover rate and days sales in receivables
How efficient is the company in managing its receivables?
What does the A/R turnover rate tell you?
a/r turnover rate reveals how many times receivables have turned (been collected) during the period
avg collection period
shows how many days on average it takes the company to collect their a/r
receivables turnover formula
SR/ avg a/r
avg collection period formula
365/ receivables turnover
Inventory Turnover helpful for?
how eficient is the company at managing their inventory
inventory turnover ratio helpful for?
-shows how many times the inventory was turned (sold) during the period
avg days in inventory helpful for?
avgt days in inv reveals how many days on avg it takes the company to sell inventory
Inventory turnover formula
cogs / avg inv
avg days inventory held formula
365 / inventory turnover
What do payables ratios tell you?
how long a company is waiting to pay their payables
payables turnover ratio tells you?
how many times payables turned (were paid) during the period
Payables turnover formula
cogs / avg accounts payable
avg days payable tells you?
how manydays on avg the firm waited to pay their suppliers
avg days payables formula
365/ payables turnover
what does days in financing tell you?
what are the financing costs of the firms operations
days in financing formula
days in inventory + days in a/r - days in payables
Common size financial statements (vertical analysis)
express each item as a % of total amount within the same year
-typicall total assets for b.s. items and sales for income statements items
trend statements (horizontal analysis)
express each item as a percentage of the same item in another year (base year)
Ratio analysis practice problem
