Financial Statement Analysis Flashcards
What are three most common analysis tools?
- Horizontal analysis: Calculates change in account balance from one period to next – expressed in % terms.
- Vertical analysis:all items in the financial statement expressed as a % of one significant item in the statement.
- Ratio analysis
Name some ratios used to assess Profitability?
- Profit margin
- ROA
- ROE
- EPS
- P/E
Name some ratios used to assess Liquidity?
- Current ratio
- Quick ratio
- Inventory turnover
- Receivables turnover
Name some ratios used to assess Solvency?
- Debts to assets
- Debts to liabilities
- Times interest earned
What is profit margin?
Its formula?
Rate of return on net sales (profit margin) measures % of each net sales dollar earned as profit.
Profit/ Net Sales
What is ROA?
Its formula?
Rate of return on total assets (ROA) measures success in using assets to earn profit.
Profit before tax and interest/ Average total assets
What is ROE?
Its formula?
Rate of return on ordinary shareholders’ equity (ROE) shows how much profit is earned for each $1 invested by ordinary shareholders.
Profit/ Average shareholders’ equity
What is EPS?
Its formula?
Earnings per share (EPS) measures the amount of profit earned for each ordinary share.
Profit/ Average ordinary shares issued
What is P/E ratio?
Its formula?
Price/earnings ratio (P/E) shows the market price of $1 of earnings = investors’ view of company.
Market price per share/ EPS
=> Low P/E => Company is under valued => Investors should buy its shares
What is Inventory turnover?
Its formula?
Inventory turnover: measures no. of times company sells its average level of inventory during year.
Cost of sales/ Average Inventory
What is Accounts Receivable turnover?
Its formula?
Accounts receivable turnover: measures ability to collect cash from credit customers.
Net credit sales/ Average net account receivables
The higher the ratio, the quicker the cash collection.
What is Debt to equity ratio?
Its formula?
Debt to equity ratio: shows proportion of total liabilities to total equity re: financing of assets.
Total liabilities/ Total equity
=> the higher the ratio, the higher the financial risk.
What is Times-interest-earned ratio?
Its formula?
Times-interest-earned ratio measures no. of times profit before interest & taxes can cover interest exp.
Profit before Interest and Tax/ Interest expense
=>A high ratio indicates ease in paying interest, a low ratio suggests difficulty in meeting interest expense.
