Lecture 06 - Analyzing & Interpreting Flashcards
Analyzing and Interpreting Financial Statements
What are the 3 steps to estimate total fixed costs, for solvency analysis? (2)
2 time periods
(costs, aktivity)
What analysis forms do you know? (2)
Vertical and horizontal analysis
What does horizontal analysis?
Changes in data across time
What does vertical analysis?
Conversion into ratio form
How do you calculate percent change?
How do you calculate
- ROE (return on equity),
- ROA (return on assets) ,
- ROFL (return on financial leverage)
- ROFL = ROE - ROA
- ROE = Net income / average total stockholders` equity
- ROA = Earning without interest expense / average total assets =
Following the DuPont analysis, what two measures can return on assets (ROA) be disaggregated into? (2)
- Net profit margin (PM)
- Asset turnover (AT)
How do you calculate ROA with DuPont analysis? (2)
ROA = Profit Margin (PM) x Asset Turnover (AM)
(Kennzahl, die die Rentabilität eines Unternehmens in Bezug auf seine Vermögenswerte misst.)
Give me a definition for PPET! (2)
- Meaning
- Calculation
PPET = Property, Plant & Equipment Turnover
PPET
= Sales revenue / Average PPE
(net of accumulated depreciation)
Which from the following parameters are profit margin and which are asset turnover?
- Mark profit margin in bold and asset turnover in black?
● Gross profit
● Accounts receivable turnover
● Property, Plant & Equipment Turnover
● Expense to sales
● Inventory turnover
Solution:
● Gross profit
● Accounts receivable turnover
● Property, Plant & Equipment Turnover
● Expense to sales
● Inventory turnover
Definition:
Whenever we compare an Income statement amount with a balance sheet amount, the balance sheet amount should be, .. (2)
- the average balance for the period (beginning balance plus ending balance divided by 2)
- rather than the year-end balance.
What parameters do you use to
- analyze the liquidity (4)
- analyze the solvency? (2)
How do you calculate, ..
SOLVENCY
1. current ratio,
2. quick ratio,
3. operating cash flow
to current liabilities,
4. cash burn rate
LIQUIDITY
5. debt-to-equity
6. times interest earned
SOLVENCY
-
Current ratio =
Current assets /
current liabilities -
Quick Ratio =
quick assets /
current liabilities =
(Cash + short-term securities + accounts receivable) /
current liabilities -
Operating cash flow to current liabilities =
Cash flow from operations /
average current liabilities -
Cash burn rate =
Cash flow over the period /
Number of days in the period
LIQUIDITY
-
Debt-to-equity ratio =
Total liabilities /
Total stockholders` equity -
Times Interest Earned (TIE) =
Earnings before interest & taxes /
Interest expense
(add up interest expense to earnings before tax)
How can a company use DuPont Analysis? (3)
Financial performance measurement method that breaks down a company’s
Return on Equity (ROE)
into three components:
- Net Profit Margin (PM),
- Asset Turnover (AT),
-
Financial Leverage
(Equity Multiplier).
Understanding performance by analyzing its
- Profitability,
- Efficiency,
- Use of leverage.
How does solvency analysis help investors and creditors assess the financial stability of a company?
- What key metrics are commonly used in this evaluation? (3)
Assessing its ability to meet long-term financial obligations.
Commonly used metrics in this evaluation include
- Debt-to-Equity Ratio
- Interest Coverage Ratio
-
Cash Flow to Debt Ratio
(assets, & liabilities)
What is the significance and purpose of FA? (6)
What type of financial analysis to you know? (3)
What is financial statement analysis? (2)
- Relationship of financial factors
- Trend in a Single-Statement-Set
What are the basic financial statements? (4)
