Financial Statement Analysis Flashcards
Ratios help company to do what?
compare its performance with peers or its own past performance
ROE (Return On Equity) =
Net Income/Avg Total Owner’s Equity. shows the return a business earned on the equity invested by owners
What is DuPont Framework
Du Pont Framework breaks down ROE into 3 components to figure out where the returns are being generated.Help management determine which areas of the company are weak. Also useful to compare two companies, even if they have the same ROE
What are the components of Dupont Framework?
1)Profitability 2)Operating Efficiency 3)Financial Leverage
ROE =
Profit Margin * Asset Turnover * Leverage
What is Efficiency?
How well its company uses assets to generate revenue
What is Financial Leverage?
How a company uses Debt to finance its assets
ROE = Net Income/Avg. Owner’s Equity=
Net Income/Sales * Sales / Avg Total Assets * Avg Total Assets/Avg Equity
Profit Margin =
Net Income/Total Sales (How much a company keeps in earnings for every dollar of sales after all expenses have been subtracted)
What does Profit Margin help understand?
Which company is best at controlling its costs and earning profits
Gross Profit Margin =
Gross Profit (Sales - COGS)/ Sales.
Captures percentage of revenue available to pay for a company’s expenses after cost of goods sold is subtracted.
What is EBIAT?
earnings Before Interest After taxes. Good measure of company’s operating performance. Shows company’s earnings without affects of company’s capital structure or amount of debt to equity.
EBIAT Or NOPAT (Net Operating Profit After Taxes)=
EBIT (Income before taxes + Interest Expense) * (1-corporate tax rate)
Corporate Tax Rate =
Tax Expense / Income Before Taxes
What is Asset Turnover?
How well company uses assets to generate revenues. Using Fewer assets to generate higher revenue operates better from efficiency perspective.
Asset Turnover =
Revenues (From Income Statement) / Avg Total Assets (This is got from Balance Sheet)
What is Inventory Turnover?
Shows how fast a company is selling its inventory. No of times a company sells its inventory and replaces it. More inventory for given sales reduces eficiency because extra inventory uses resources
Inventory Turnover =
COGS/Avg. Inventory. No of times a company sells inventory per year. Higher value => More efficient Inventory Management
What is Days Inventory
Avg no of days item sits in inventory before being sold
Days Inventory =
Average Inventory/(COGS/365), 365/Inventory Turnover
What is Accounts Receivable Turnover
Show how quickly a company collects payments from its customers. Operating efficiency. No of times a year outstanding avg receivable balance is fully collected
Accounts Receivables TurnOver =
Net Credit Sales / Avg Accounts Receivable Balance
What is Average Collection Period/Days Sales outstanding
365/Accounts Receivable Turnover. Avg Number of days it took to collect cash from customer.
