Lecture 7/8: Financial Statement Analysis Flashcards
Absolute change
Amount in current period - amount in previous period
Relative change
[(Amount in current period - amount in previous)/amount in previous] x100
Horizontal analysis
- Absolute change year to year
- Relative change (%) year to year
Vertical analysis
Compare to a base within the same statement
=next line item/base item
the base item is usually the larges line item
Trend analysis
Index the base year (earliest year) as 100 and then then do next year/indexed year value x100 to get the next indexed value
Ratio analysis
[One line item/other line item]*100
Return on equity (ROE)
Tells how well the entity is generating profits relative to the amount of equity invested by shareholders.
[Profit available for distribution/average ordinary equity]*100
Return on assets (ROA)
Ability of a business to use its assets to generate a return
= EBIT/Average Total Assets
Gross profit margin
= gross profit/sales revenue*100
EBIT profit margin
The rate at which sales revenue is converted into profit
= EBIT/sales revenue*100
Expense ratio
The extent to which sales revenue is consumed by one particular expense or one cost centre
= ()expense/sales revenue*100 - can be conducted for any expense occuring in the statement
Cash flow to sales ratio
The rate at which sales revenue generates operating cash flow
= Net operating cash flows/sales revenue
Asset turnover
Indicates how well a business can generate sales revenue from assets
= Sales revenue/average total assets
Inventory turnover/days inventory
Average number of days inventory is held
= average inventory/cost of sales *365
Days sales outstanding
= Average trade receivables / sales revenue
Days purchases outstanding
= average trade payables / (cost of sales + net increase in inventory)
Current ratio or working capital ratio
number of times over current assets could meet current liabilities
= CA/CL
Quick ration or acid test ratio test
Number of times quick assets could service CL
= (cash + receivables)/(CL - overdrafts)
Cash flow ratio
The amount of cash flow available in a period to service CL
= Net operating cash flows / CL
Debt ratio
The extent to which the entity has used debt to finance their investment in assets (60% is considered high)
= total liabilities/total assets
Equity ratio
= 100% - debt ratio
Debt to equity ratio
= Debt ratio/equity ratio
Interest coverage ratio
=EBIT/finance costs
finance costs = interest expense - interest revenue
Average interest rate
= finance costs x average interest bearing liabilites
Debt coverage ratio
= Non-current liabilities/net operating cash flows
(cash flows generated from operations)
Net tangible asset backing per share (NTAB)
Earnings per share (EPS) / Diluted EPS
Profit avail to ordinary shareholder / WAVE no. of ordinary shares on issue **OR **
Dividend payout ratio
Price Earnings Ratio (P/E Ratio or PER)
Limitations of financial statement analysis
- Agency issues - choices, estimations and judgements thar apply to figures in the analysis which may skew the ratios
- Disclosure - issues relating to what is disclosed and in what levels
- Timing - of access of information - may be outdated by the time the reports are released
- Change in accounting standards and policies over time
