FINC 490 Flashcards
activity
how efficiently is the firm using its assets to
generate sales?
debt
how much flexibility does the firm have?
profitability
how profitable is the firm?
cash flows
are the firm’s cash flows adequate?
type of activity ratios
Days Inventory Held
Days Sales Outstanding
Total Asset Turnover
Days inventory held
Days inventory held = inventory/daily cost of sales
Meaning: Average days to sell inventory
Bad if ↑ because the firm may have unsalable inventory
Days sales outstanding
Days sales outstanding = receivables/daily credit sales
Meaning: Average days to collect receivables
Bad if ↑ because the firm may eventually have a cash flow
problem
Total asset turnover
Total asset turnover = sales/total assets
Meaning: sales generated by assets
Bad if ↓ because it means that the firm is using its assets less
efficiently to generate sales
debt
Debt = total liabilities/total assets
Meaning: % of firm’s assets financed with debt
Bad if ↑ as it means the firm’s financial flexibility is ↓
Net profit margin
Net profit margin = net income/sales
ANALYSIS STEP 1: Bad if < 0 because the company has
no profit.
ANALYSIS STEP 2: Bad + ↓ because it means the firm has
↓ profitability
Cash Flow Statement
Inflows are positive, outflows are negative
Operating cash flows
ANALYSIS STEP 1: Bad if < 0 because it means
that the firm is not generating any cash; cash flow
problem
ANALYSIS STEP 2: Bad if + ↓ because it means
that the firm is generating less cash; potential cash
flow problem
Investing cash flows
cash from buying (-) or selling (+)
capital assets [spending on long-term assets]
No bad trend
Financing cash flows
cash from issuing debt or equity (+),
cash used to pay dividends, pay back debt or buy back stock
(-) [use of credit cards, savings]
! Bad if + for at least the 2 most recent years because it
means the firm is relying on debt, equity, or both to fund
operations
Operating + investing cash flows
Bad if < 0 because it means there is a potential cash
flow problem
