Introduction Flashcards
Financial Statement- definition
Financial statements are written records that convey the business activities and the financial performance of a company.
Financial statement - users and usages
users: governement, agencies, firms, accoutnants
usage: ensure accuracy, investing purposes
What are the different financial statements?
Balance sheet
Income Statement
Cash Flow Statement
What is the main advantage of financial investment?
unbiquitous and convenient because they are quantitative.
- common form accros different types of business
Express everything in common unites
- provide a systematic way of linking the past, present and expected future performance
Financial ratios
- Financial ratios consist of a simple comparison between items of interest from a balance sheet and/or income statement that yield insight into condition or performance.
Financial ratios - use
- They give some knowledge about the recent performance and current financial condition of the firm Financial health
What are the 6 financial ratios categories?
- Growth
- Profitability
- Liquidity
- Leverage
- Efficiency
- Risk
Why managers and investors are looking at growth?
- Managers and investors are interesting about producing more cash – their company to become more valuable.
What are the ways to mesure growth rate of a specific item?
Company’s year to year growth rates
Coumpound average growth rate (CAGR)
What is the formula for Company’s year to year growth rate?
One year Growth Rate=
Sales n+1 - Sales n / Sales n
What is the formula for CAGR?
Year CAGR=
(Sales n+t/ Sales n)^ (1/t) -1
The growth rate is used to mesure the growth of which items? (where can we find these items)
Sales & Operating profit
We can find them on the income statement
What is an operating profit?
- Operating profit/ benefice d’exploitation = earnings before interest and taxes (EBIT)
What Managers and investors are looking at profitability
In addition to knowing whether a company is growing, we want to know if it is profitable.
Indeed having a look at gross profit, operating profit and net income is not enough.
We need to compare the profits to something: how much sales were required to generate a given profit?
What are the different profitability ratios?
- Profit Margin
- Return on Equity
What is a profit margin ?
Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits
What are the different formulas of profit margin?
Gross margin
Operating margin
Net margin
What is a gross margin?
How profitable firm operations are without taking into account administration and overhead cost
What is the formula of gross margin?
Gross margin = gross profit/ sales
What is a operating margin
How profitable the company is before taking into account its interest expense
What is the formula of operating margin?
Operating profit/ Sales
What is a net margin?
Measure profitability after everything is taking into account: production cost, overhead cost, interest expense and taxes.
What is the formula of a net margin?
Net margin = Net income/ Sales
Regarding the profit margin: Why we are not systematically only looking at the net margin? Is it not the most comprehensive and most informative one?
Not necessarily: by looking at the different margins, we can know more about the different reasons for good or bad performance. If net margin has decline in a given year, doesn’t tell us why. Due to higher production cost? Overhead?
What is the return on equity ?
Part of the profitability ratio
ROE is considered the return on net assets. ROE is considered a measure of how effectively management is using a company’s assets to create profits.
What is the return on beginning equity? (ROBE)
The return on beginning equity (ROBE) compares net income during a given year to owner’s equity at the beginning of the year.
What is the formula of the ROBE?
ROBE= Net income/ Equity
