Financial Statements Analysis Flashcards
the process of providing funds for business activities.
Financing
Types of financing
Equity and Debt
is calculated by dividing total liabilities by total asse
Financing ratio
also called debt rate representing creditors’ risk in the business.
Financing ratio
used to evaluate the level of debt relative to another financial metric.
Leverage ratio
Common leverage ratios
Debt to equity ratio, equity multiplier, times interest earned
A measure of the degree to which a company is financing its operations with debt rather than its own resources.
Debt to equity ratio
measures the portion of a company’s assets financed by shareholders’ equity rather than debt
equity multiplier
it is a solvency ratio that indicates its ability to pay its debts
times interest earned
the Return on Equity (ROE) is greater than the Return on Assets (ROA)
Good financial leverage
are ratios that analysts and investors can use to analyze and make predictions about a company’s financial performance and potential future growth.
Investing Ratios
involves the comparison of two periods (months, or quarters, or years, etc.), two companies, actual and budgets and other bases of analyses.
Horizontal or comparative analysis
the difference between the figures are calculated and the %age change from one period to the next is computed using the earlier period as the base
Horizontal or comparative analysis
it is a form of horizontal analysis but the comparison extends beyond two years.
-used to track what happened in the past to provide a pattern of what may happen in the coming years.
Trend Analysis
it uses indexes and ratios for easier interpretation.
Trend Analysis
expresses each item within a financial statement as a percent of a base amount; generally the base amounts commonly used is the total assets for the balance sheet and the net sales for the income statement.
VERTICAL OR COMMON-SIZE ANALYSIS
it can be used to compare two periods to analyze the reasons for the changes; or to compare two entities to check their performances; or to budgeted figures to evaluate adherence
VERTICAL OR COMMON-SIZE ANALYSIS
take into account the interrelationships of the items in each financial statement
FINANCIAL MIX RATIOS
Determines the portion of sales that went into the company’s earnings.
Profit Margin or Return on Sales
measures the ability to generate return on every asset that are used to operate the business
Return on Assets (ROA)
measures the amount earned on the owners’ or stockholders investment.
Return on Equity (ROE)
measured when the company issues two classes of stocks.
Return on Ordinary Equity (ROOE)
measures the amount of net income earned by each common share. computed for ordinary shares only.
Earnings Per Share (EPS)
indicate how fast a company or its business is growing
Growth Ratios
compares a stock’s price to its earnings.
Price-earnings ratio
stocks with high P/E ratios may suggest that investors are expecting _______ earnings growth in the future.
Higher
stocks with low P/E ratios are appealing to value investors because it means they are paying ____ for every dollar of earnings they receive.
Less
shows how much a company pays out in dividends each year relative to its stock price.
Dividend yield ratio
reflects the ability of the organization to return investments to owners in terms of cash or dividend, not in terms of actual profit.
Dividend yield ratio
the total amount of dividends that a company pays to shareholders relative to its net income.
-this ratio is the percentage of earnings paid to shareholders via dividends.
Dividend payout ratio
-measures the book value of a firm on a per-share basis
Book value per share
used to determine a debtor’s ability to pay off current debt obligations without raising external capital
LIQUIDITY RATIOS
a measure of a company’s ability to pay its current liabilities with its current assets (liquidity).
Current ratio or WC ratio
used to determine a company’s short-term liquidity and ability to cover its current liabilities without selling inventory assets.
Quick ratio or acid test ratio
it represents a company’s ability to pay current liabilities with assets that can be converted to cash quickly.
Quick ratio or acid test ratio
defensive assets are technically the same as quick assets: cash, cash equivalents, marketable securities, current receivables.
Defensive interval ratio
the concept of using borrowed capital as a funding source.
-it is often used when businesses invest in themselves for expansions, acquisitions, or other growth methods.
FINANCIAL LEVERAGE
used to evaluate the level of debt relative to another financial metric.
leverage ratio
leverage ratios are referred to as ________ratios
gearing
a measure of financial leverage that demonstrates the degree to which a firm’s operations are funded by equity capital versus debt financing; it compares some form of owner’s equity or capital to debt or funds borrowed by the company.
Gearing ratio
