Introduction & Liquidity Analysis Flashcards
What are two different accounting policies for income statements?
- Cost based (divided on types of costs).
- Function based (divided on the different units/functions of the company)
We cannot directly compare two statements that have different policies.
What is the clean surplus relation?
Equity is only affected by profit/loss and owner transactions
E(t) = E(t-1) + Net profit - Div + New issue
What is the statement of comprehensive income?
The statement where things that affect equity but not profitability are brought up.
What are two important business decisions?
- What changes of assets need to be done?
- Capital budgeting
- Affects balance sheet and cash flow statement - How to use existing assets in the best possible way?
- Costing
- Affects income statement
What are three things within a company that affect each other?
- Strategy
- Financial consequences
- Value creation
What are the three dimensions of financial analysis?
- Liquidity (short-term survival)
- Profitability
- Financial strength (long-term survival)
What are some key ratios of Liquidity?
- Cash & Cash equivalents
- Current ratio
- Quick ratio
- Interest coverage ratio
- Capex ratio
- Cash flow statement (cannot only rely on ratios)
What are some things we consider when evaluating performance?
- Benchmarking
- Trends
- Perspective
- Understanding industry and market
What does “current” mean in current assets/liabilities?
Due within 1 year
What is the current ratio formula and what is a rule of thumb for its value?
Current ratio = Current Assets / Current liabilities
(found in balance sheet)
Rule:
CA>CL, approx. 1,5 - 2
What is the Quick ratio formula and what is a rule of thumb for its value?
Quick ratio = (Current assets - Inventory) / Current liabilities
(found in balance sheet)
Rule:
(CA-I)>CL
>1
What are strengths and weaknesses of the Current and Quick ratios?
Strengths:
+ Simple
Weaknesses:
- Static (balance sheet only gives view of certain point in time)
- Rule of thumb not valid for all industries (traditionally manufacturing)
- Liquidation scenario
What is the interest coverage ratio formula and what is an acceptable level?
Interest coverage ratio = EBIE / Financial expenses
(found in income statement)
EBIE > financial expenses
(2-4 times greater)
What companies typically assess the interest coverage ratio?
Banks and rating companies
Why do we not want the interest coverage ratio to be too high?
Since borrowing can be necessary for growth (how are they otherwise financing growth?)
What are strengths and weaknesses of the interest coverage ratio?
Strengths:
+ Dynamic
+ Shows if financial expenses can be covered
Weaknesses:
- Includes non-cash items (profit is not equal to cash)
What is the Capex ratio formula and what is an acceptable level?
Capex ratio = Cash flow from operations / Cash flow from investing activities
(found in cash flow statement)
CFO>CFI
Capex > 1 in the long run
(ratio not applicable is CFI is positive, also not useful when CFO is negative)
What are strengths and weaknesses of the Capex ratio?
Strengths:
+ Shows ability to finance investments by own means
Weaknesses:
- Fluctuates over time, not suitable for short periods
What is a liquidity budget and in which industries can they be particularly important?
Used for internal purposes, sums up payments to make sure the firm don’t run out of cash. Often done per month, to make sure no problems arise.
Especially important in seasonal industries
