Lecture 6 Financial statement analysis Flashcards
Current ratio
current assets (Cash, Inventory) / current liabilities (Accounts payable, Wages) Measures a company’s ability to pay obligations in short-term.
Quick ratio
(current assets- inventory) / current liabilities
Why this is done is to remove assets which the company might not be able to turn into cash quickly.
Net working capital
current assets - current liabilities
Shows if a company can meet its current obligations.
Debt ratio
total debt/ total assets
Measures leverage.
Debt to equity ratio
total debt/ total equity
Shows the proportion of assets funded by debt versus equity.
Times interest earned
EBIT/ interest charge
How easily business can afford interest bill?
Return on equity (ROE)
ROE before tax: (EBT/Total average equity)100%
ROE after tax: (Net income/Total average equity)100%
Measure of overall profitability of shareholder investment.
How much shareholders earn on their investment.
Return on debt (ROD)
annual interest/ total debt
Average interest rate that the company is borrowing at.
Return on investment (ROI)
annual EBIT/ total investment
Measure the return on total investment made into the company.
Can be broken down into Margin on sales and Turnover rate.
Margin on sales (profit margin)
EBIT/ sales *100%
Measures a company’s profitability.
Analysis of ROI
profitability x efficiency
margin on sales x turnover rate
ebit/ sales x sales/ total assets
Analysis of ROE (DuPont analysis)
Profitability x efficiency x leverage
EBIT/ sales x sales/ total assets x total assets/ equity
Relationships between ROE, ROI, and ROD
ROE = ROI + (ROI - ROD) x (Debt/ equity)
Average collection period
(Accounts receivables/ annual sales) x 365
How long a company waits before getting cash?
Average inventory period
(inventory level/ annual costs of sales ) x 365
How long it takes before inventory is sold?
Turnover rate (asset turnover)
annual sales/ total assets
Measure of efficiency with which assets used to generate sales.
Vary for different industries.
Valuation ratios
Asses performance - meeting stockholders. Used by investors for assessing attractiveness of shares
Is company meeting shareholder’s expectations? / Is the company attractive to invest in?
Earnings per share
net income/ number of shares (outstanding)
How much profit available per share?
Basic EPS
(net) profit/ number of shares
Diluted EPS
assumption that all conversions that would lower EPS have taken place
Price to earnings ratio
Indicates price one pays for a dollar in earnings.
The market price of a share/ earnings per share
Shows relationship between Net income, earnings and price investors willing to pay.
Dividend yield
dividend per share/ market price per share (at the beginning of the year).
Measures attractiveness of a company by purely looking at dividends to expect.
Total yield
(dividend per share + market price change)/ market price per share (at the beginning of the year)
Total return to stockholders considering the changes in market prices.
Dividend cover
(net) earnings/ dividends
How secure future dividend payments are?
Payout ratio
dividends/ (net) earnings
Low for high growth Cos. High for cash cows.
Market to book ratio (M/B ratio)
market value/ book value
How much value over book created?
High for companies with intangible assets not included on the balance sheet.
Vertical analysis
Technique to produce common-sized financial statements, allow comparison of large companies and small companies because comparing percentage instead of dollar amount, present the financial statement amounts as a percentage of a base number
Margin on sales
EBIT/ sales
Benchmarking
The ratio themselves should then be compared to what is normal in the type of industry
