FInancial statements and investment appraisal Flashcards
What is the general structure of financial ratios?
one line/another line x 100 (to make a %)
what are the three main types of financial ratio needed?
profitability
liquidity
efficiency
Whats the general structure for profitability ratios?
type of profit/rev
Return on capital employed formula?
net profit / capital employed
capital employed formula?
Total assets - current liabilities
whats the general liquidity ratio structure?
a type of current assets / current liabilities
Acid Test formula
CA - stock / CL
current ratio
current assets / current liabilities
whats the general
turnover ratio structure?
one line from the income statement/ related line on the balance sheet
inventory turnover ratio?
cost of goods sold / inventory
payables turnover ratio?
cost of goods sold / payables x 365
what does ARR mean?
Average Rate of Return
what does NPV mean?
net present value
How to calculate ARR?
total return = total net cashflows - investment
total return / years running = Average annual return
Average annual return / investment x 100
How to calculate NPV?
cash flow x discount factor = present value
then add all together
what are financial statements?
accounting reports which summarise the financial activities and performance of a business
what are the three types of financial statement
balance sheet
income statement
cash flow forecast
What does an income statement show?
the revenue and expenses of a business over a period of time
what does a balance sheet show?
the assets liabilities and equity at a point in time
Why do we use profitability ratios?
to measure how efficiently a business generates profit
How to calculate gross profit?
rev - cost of sales
How to calculate operating profit?
operating profit?
gross profit - operating expenses
How to calculate net profit?
operating profit - interest
Return on Equity formula?
Net profit / equity
why do we use liquidity ratios?
to tell how well a business can cover short term debts
why do we use efficiency ratios?
how quickly a business is selling inventory, how reliable it is at paying and how quick it receives money
receivable turnover ratio?
revenue / receivables
what are the three types of investment appraisal?
payback, ARR, NPV
how is payback measured?
time: days/months/years
how is ARR measured?
% return
How is NPV measured?
monetary values
How to calculate payback?
identify net cash flow for each year
keep a running total of cash flows (cumulative)
calculating the precise payback by residual / next cash inflow
