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Financial Accounting > Lecture 6 Financial statement analysis > Flashcards

Lecture 6 Financial statement analysis Flashcards

1
Q

Current ratio

A 
current assets (Cash, Inventory) / current liabilities (Accounts payable, Wages)
Measures a company’s ability to pay obligations in short-term.
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2
Q

Quick ratio

A

(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.

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3
Q

Net working capital

A

current assets - current liabilities

Shows if a company can meet its current obligations.

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4
Q

Debt ratio

A

total debt/ total assets

Measures leverage.

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5
Q

Debt to equity ratio

A

total debt/ total equity

Shows the proportion of assets funded by debt versus equity.

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6
Q

Times interest earned

A

EBIT/ interest charge

How easily business can afford interest bill?

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7
Q

Return on equity (ROE)

A

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.

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8
Q

Return on debt (ROD)

A

annual interest/ total debt

Average interest rate that the company is borrowing at.

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9
Q

Return on investment (ROI)

A

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.

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10
Q

Margin on sales (profit margin)

A

EBIT/ sales *100%

Measures a company’s profitability.

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11
Q

Analysis of ROI

A

profitability x efficiency
margin on sales x turnover rate
ebit/ sales x sales/ total assets

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12
Q

Analysis of ROE (DuPont analysis)

A

Profitability x efficiency x leverage

EBIT/ sales x sales/ total assets x total assets/ equity

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13
Q

Relationships between ROE, ROI, and ROD

A

ROE = ROI + (ROI - ROD) x (Debt/ equity)

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14
Q

Average collection period

A

(Accounts receivables/ annual sales) x 365

How long a company waits before getting cash?

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15
Q

Average inventory period

A

(inventory level/ annual costs of sales ) x 365

How long it takes before inventory is sold?

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16
Q

Turnover rate (asset turnover)

A

annual sales/ total assets
Measure of efficiency with which assets used to generate sales.
Vary for different industries.

17
Q

Valuation ratios

A

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?

18
Q

Earnings per share

A

net income/ number of shares (outstanding)

How much profit available per share?

19
Q

Basic EPS

A

(net) profit/ number of shares

20
Q

Diluted EPS

A

assumption that all conversions that would lower EPS have taken place

21
Q

Price to earnings ratio

A

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.

22
Q

Dividend yield

A

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.

23
Q

Total yield

A

(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.

24
Q

Dividend cover

A

(net) earnings/ dividends

How secure future dividend payments are?

25
Q

Payout ratio

A

dividends/ (net) earnings

Low for high growth Cos. High for cash cows.

26
Q

Market to book ratio (M/B ratio)

A

market value/ book value
How much value over book created?
High for companies with intangible assets not included on the balance sheet.

27
Q

Vertical analysis

A

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

28
Q

Margin on sales

A

EBIT/ sales

29
Q

Benchmarking

A

The ratio themselves should then be compared to what is normal in the type of industry

Financial Accounting (6 decks)

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