Financial Statement Analysis Flashcards
What are the four financial statements that all public companies must produce?
BS, IS, Statement of cashflow & Statement of changes in equity
What is the role of an auditor?
Its a third party which checks if the financial statements are reliable and prepared according to IFRS/GAAP
What is the BS identity?
Assets = Liability + Shareholders equity
The book value of a companys assets usually does not equal the market value of those assets. What are reasons for the difference?
Market value is usually higher bc it includes profitability, intangibles and future growth prospects
What is a firm’s enterprise value and what does it measure?
The cost to take over the business (market value + debt - cash)
What is the difference between a firm’s gross profit and its net income?
Gross profit focuses only on sales/costs that are directly related to the good/service the company sells.
Net income includes all operations of revenue/expenses besides the ones already mentioned and has interest and taxes deducted.
What are the diluted earnings per share?
Calculation to figure out the quality of a companys earnings per share (EPS), if all convertible securities are exercised
Why does a firm’s net income not correspond to cash generated?
Bc there are non-cash entries listed in the IS (such as depreciation) and certain uses of cash aren’t listed on the IS (for example purchase of PPE)
What are the components of the statement of Cashflow?
- Operating activities
- Investment activities
- Financing activities
Where do off-balance sheet transactions appear in a firm’s financial statements?
in the MD&A (management discussion & analysis), which is a preface to financial statements providing a background on the company & any significant events
What information do the notes to financial statements provide?
Further details such as accounting assumptions, details of stock-based compensation plans for employees, leases, taxes, etc
Why is EBITDA used to assess a firm’s ability to meet its interest obligations?
Because depreciation and amortization aren’t actual fash expenses, but would get deducted when computing EBIT
What is the difference between a firm’s book debt-equity ratio and it’s market debt-equity ratio?
The market value of equity is easier to interpret bc the book debt ratio might be negative, making the ratio meaningless
To compare the valuation of firms with very different leverage, which valuation multiplies would be most appropriate?
Valuation ratios based on the firms enterprise value. For example:
- ratio of enterprise to revenue
- ratio of enterprise to operating income, EBIT or EBITDA
What is the DuPont Identity?
A tool to express the ROE (return on equity) in terms of the firms profitability, asset efficiency and leverage to gain a further insight into a firm’s ROE
calculated:
Net profit margin * asset turnover * equity multiplier
What information does the cashflow statement provide?
how much cash the company has generated
Why is profit different from cash?
- you can’t use profit go pay obligations bc it’s just an accounting term. Profit includes non-cash expenses such as depreciation
- Cash is needed to pay bills. Some uses of cash are not deducted on the IS (f.e. Investment in PPE)
What is significant about operating activities?
directly related to the goods & services
What is significant about investing activities?
cash outflow - > purchase of assets or money invested in financial instruments
What is significant about financing activities? What are their in- & outflows
- debt & equity financing
- inflows are borrowings or sale of shares
- outflows are repayments or dividends
Name 3 typical cash inflows!
- Decrease in assets (bc cash hasn’t flown, therefore added back)
- Increase in liabilities (bc cash hasn’t flown yet)
- depreciation and other non-cash charges (added back because it’s non-cash)
- sale of shares
Name 3 typical cash outflows!
- Increase in assets (bc we needed to spend cash on inventory for example)
- Decrease in liabilities (repayments)
- dividends paid
- repurchase of shares
What is a capital expenditure?
purchase of a new PPE (doesn’t immediately appear as expense in IS and therefore needs to be deducted in the cashflow statement)
How can you calculate retained earnings?
Net income - dividends
How do you calculate the change in shareholders equity?
Change in share capital + change in retained earnings
