Financial Statement Analysis Flashcards
Accounts Receivable Turnover
is a measure of the reasonableness of the accounts outstanding. This measurement uses net credit sales, which includes notes receivable from sales transactions.
Acid-Test Ration
measures immediate liquidity. This ratio uses quick assets which are cash, receivables, and marketable securities.
Asset Turnover
The ratio of net sales to total assets measures the effective use of assets in making sales. The higher the asset turnover, the more effectively the assets of the company are being used.
net sales/
Total Assets
Average Collection Period
The accounts receivable turnover can be used to determine the average collection period The ratio of 365 days to the accounts receivable turnover; also called the number of days’ sales in receivables of accounts receivable, or number of days’ sales in receivables. The average collection period is computed as follows:
365 days/
AR Turnover
Common Size Statements
A company financial statement that displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company.
Current Ratio
measures the ability of a business to pay its current debts using current assets.
Horizontal Analysis
A procedure in fundamental analysis in which an analyst compares ratios or line items in a company’s financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration.
Industry Averages
Metrics provided by trade organizations used to compare against to determine performace.
Leveraged buyout
In a leveraged buyout Purchasing a business by acquiring the stock and obligating the business to pay the debt incurred, the purchasers of a business buy the stock, having the corporation agree to pay the sellers. The result is that the debt created by the purchase is a debt of the corporation.
Liquidity
The ability to convert assets into cash. Ultimately the ability of a company to pay its debts.
Price-earnings Ratio
compares the market value of common stock with the earnings per share of that stock. It is computed as follows:
Market Price per share/
earnings per share
Quick Assets
which are cash, receivables, and marketable securities.
Ratio Analysis
Ratio analysis is used to assess a company’s profitability, financial strength, and liquidity. Ratio analysis investigates a relationship between two items either as a ratio (2 to 1 or 2:1) or as a rate (percentage).
Return on Common Stock Holders equity
is a key measure of how well the corporation is making a profit for its shareholders. It is computed as follows:
Income available to CSH/
CSH Equity
Total Equities
The sum of a corporation’s liabilities and stockholders’ equity.
Trend Analysis
An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.
There are three main types of trends: short-, intermediate- and long-term.
Vertical Analysis
A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business.
Working Capital
is a measure of the ability of a company to meet its current obligations. It represents the margin of security afforded short-term creditors. Working capital, sometimes called net working capital, is computed as follows:
Current assets - current liabilities
Financial ratios have three classifications:
- Profitability, operating results, and efficiency
- Financial strength
- Liquidity
Rate of Return on Sales
The rate of return on sales measures what part of each sales dollar remains as net income. It measures operating efficiency and profitability. The higher the rate of return on net sales, the more satisfactory are the business operations. Management should look for and investigate unfavorable trends.
net income/net sales =
Earnings per share of common stock
measures the profit accruing to each share of common stock owned. It is computed as follows:
Income available to CSH/
Average shares available in a year.
rate of return on total assets measures
measures the rate of return on the assets used by a company. This rate helps the analyst to judge managerial performance, measure the effectiveness of the assets used, and evaluate proposed capital expenditures. The rate is computed as follows:
Income Before expense and income taxes/
Total assets
NUMBER OF TIMES BOND INTEREST EARNED
A measure of financial strength, it shows if net income is sufficient to cover the required bond interest payments.
Income before I&IT/
bond interest cash requirement
Ratio of Stockholders equity
A financial measure of the portion of total capital provided by the stockholders. It indicates the protection afforded creditors against possible losses.
SH Equity/
total equities
ratio of stockholders’ equity to total liabilities
is known as the ratio of owned capital to borrowed capital. It is computed as follows:
SH Equity/
Total Liabilities
