Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial Reporting & Analysis > LM 10: Financial Analysis Techniques > Flashcards

LM 10: Financial Analysis Techniques Flashcards

1
Q

What is the difference between a vertical analysis & horizontal analysis of a balance sheet?

A

vertical analysis: only one reporting period, dividing all items percentage of total assets

horizontal analysis involves multiple time periods or companies. focuses on the percentage increase or decrease in each item.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the vertical analysis of the income statement?

A

vertical analysis: percentage revenue or total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is cross-sectional analysis & another name for it?

A

Cross-sectional analysis (aka relative analysis) compares a specific metric of one company to another (P/E ratios or multipler)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the 3 techniques in model building and forecasting? SSS

A
  1. sensitivity analysis
  2. scenario analysis
  3. simulation analysis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is sensitivity analysis?

A

A what-if technique that shows range of possible outcomes given different assumptions (inputs)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is scenario analysis?

A

models market conditions that put pressure on a portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is simulation?

A

computer model to run sensitivity and scenario analysis and generates forecasts based on probability of each outcome.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the 5 types of financial ratios?ALSPV

A
  1. Activity ratios
  2. Liquidity ratios
  3. Solvency ratios
  4. Profitability ratios
  5. Valuation Ratios
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are activity ratios?

A

measure the efficiency of a company’s operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the 9 activity ratios? IDRDPNWFT

A
  1. Inventory turnover
  2. Days of inventory on hand (DOH)
  3. Receivables turnover
  4. Days of sales outstanding (DSO)
  5. Payables turnover
  6. Number of days payables
  7. Working capital turnover
  8. Fixed asset turnover
  9. Total asset turnover
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is inventory turnover formula and use?

A

measure of how many times the inventory is sold and replaced over a given period.

cost of goods sold/ average inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is days of inventory on hand (DOH) formula and use?

A

measurement of how many days it takes a business to sell through their stock of inventory.

number of days in period/ inventory turnover

inventory / (COGS/ 365)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is receivables turnover formula and use?

A

measures the number of times a company collects its average accounts receivable balance

revenue / average receivables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is days sales outstanding (DSO) formula and use?

A

measures the average number of days it takes a business to receive payment for goods and services purchased on credit

number of days in period / receivables turnover

accounts receivable/ (sales/365)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is payables turnover formula and use?

A

measures the rate at which a company pays off its suppliers.

credit purchases / average accounts payables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is number of days payable formula and use?

A

measure number of days it take for company to pay off its suppliers

number of days in period / payables turnover

accounts payable / (COGS/365)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is working capital turnover formula and use?

A

measures how effective a business is at generating revenue for every dollar of working capital put to use.

revenue /average working capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is fixed asset turnover formula and use?

A

measures how efficient a company is at generating sales from its existing fixed assets.

revenue / average net fixed assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is total asset turnover formula and use?

A

measures the efficiency with which a company uses its assets to produce sales.

revenue / average total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are liquidity ratios?

A

measure company ability to meet short term obligations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are the 5 liquidity ratios? CQCDC

A
  1. Current ratio
  2. Quick ratio
  3. Cash ratio
  4. Defensive interval ratio
  5. Cash conversion cycle
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the current ratio formula and use?

A

measures a company’s ability to pay short-term obligations

current assets / current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is quick ratio formula and use?

A

measures company’s ability to convert liquid assets into cash to pay for short-tern expenses and whether emergencies

(cash + short-term marketable securities + receivables) / current liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is cash ratio formula and use?

A

measure company’s ability to cover its short-term obligations using only cash and cash equivalents

(cash + short-term marketable securities) / current liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the defensive-interval ratio formula and use?

A

estimates the number of days that a company can continue operating using only its liquid assets

(short term, cash + marketable securities + receivables) / daily cash expenditures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is cash conversion cycle formula and use?

A

measures how many days it takes a company to convert the cash it spends on inventory back into cash by selling its product.

days of inventory on hand (DOH) + days sales outstanding (DSO) - number of days of payables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What are solvency ratios?

A

measure company ability to meet long-term obligations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What are the 2 types of solvency ratios? DC

A
  1. debt ratios
  2. coverage ratios
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What are the 5 debt ratios? DDDFD

A
  1. debt to assets ratio
  2. debt to capital ratio
  3. debt to equity ratio
  4. financial leverage
  5. debt to EBITDA
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is the debt to assets ratio and use?

A

total amount of debt a company has relative to its assets

total debt / total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What is the debt to capital ratio and use?

A

measurement of a company’s financial leverage

total debt/ (total debt + total shareholders equity)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is debt to equity ratio formula and use?

A

tells you how much debt you have per $1 of equity

total debt / total shareholders equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is financial leverage formula and use?

A

measures amount of debt a company is taking to finance and grow its business

average total assets / average total equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is debt to EBITDA formula and use?

A

measuring the amount of income generated and available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.

total debt / EBITDA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are the 2 coverage ratios?

A
  1. Interest coverage
  2. Fixed charge coverage
36
Q

What is interest coverage formula and use?

A

measures number of times EBIT can cover interest payments

EBIT (earnings before interest and taxes) / Interest Expense

37
Q

What is fixed charge coverage formula and use?

A

measures a company’s ability to meet fixed charges from its earnings before interest and taxes (EBIT)

(EBIT + Lease payments) / (Interest payments + lease payments)

38
Q

What are profitability ratios?

A

measure company ability to generate profits from revenue and assets

39
Q

What are the 2 types of profitability ratios? RR

A
  1. Return on sales
  2. Return on investment
40
Q

What are the 4 return on sales ratios? GOPN

A
  1. Gross profit margin
  2. Operating profit margin
  3. Pretax margin
  4. Net profit margin
41
Q

What is gross profit margin formula and use?

A

measure of profitability that shows the percentage of revenue that exceeds the cost of goods sold (COGS).

gross profit / revenue

42
Q

What is operating profit margin formula and use?

A

measures how much profit a company makes on a dollar of sales after paying COGS and operating expenses but before EBIT or earnings before interest and taxes.

operating profit / revenue

43
Q

What is pretax margin formula and use?

A

How many cents of profit business has generated for each dollar of sales before deducting taxes.

EBT (Earnings before tax but after interest) / revenue

44
Q

What is net profit margin formula and use?

A

measures how much net income or profit is generated in relation to its revenue.

net income/ revenue

45
Q

What are the 5 return on investment ratios? ORRRR

A
  1. Operating ROA
  2. ROA
  3. Return on invested capital
  4. ROE
  5. Return on common equity
46
Q

What is operating ROA formula and use?

A

measure how well a company is using its assets to generate profits from its operations

operating profit / average total assets

47
Q

What is ROA formula and use?

A

how profitable a company’s assets are in generating revenue.

net income / average total assets

48
Q

What is the return on invested capital formula and use?

A

measures how well a company’s management has utilized its capital structure

EBIT (earnings before interest and taxes) * (1- effective tax rate) / short and long-term debt and equity

NOPAT / short & long-term debt & equity

49
Q

What is ROE formula and use?

A

measure of how well a company is handling money that shareholders have contributed

net income / average total equity

50
Q

What is return on common equity formula and use?

A

measures profit or net income a company earns per dollar of common shares equity

(Net income - preferred dividends) / average common equity

51
Q

What are valuation ratios?

A

measures how a company is valued and what type of return an investor may get

52
Q

What are the 3 types of valuation ratios? VPD

A
  1. Valuation Ratios
  2. Per share quantities
  3. Dividend related quantities
53
Q

What are 4 types of valuation ratios? PPPP

A
  1. Price to earnings
  2. price to cash flow
  3. Price to sales
  4. Price to book value
54
Q

What is price to earnings formula and use?

A

a way to value a company by comparing the price of a stock to its earnings.

price per share/ earnings per share.

55
Q

What is price to cash flow formula and use?

A

measures how much cash a company generates relative to its stock price

price per share/ cash flow per share

56
Q

What is price to sales formula and use?

A

measures how much investors are willing to pay per dollar of sales for a stock.

price per share/ sales per share

57
Q

What is price to book value formula and use?

A

measures the amount of money shareholders would receive if assets were liquidated and liabilities were paid off.

price per share/ book value per share

58
Q

What are the 5 types of per share quantities ratios? BDCED

A
  1. Basic EPS
  2. Diluted EPS
  3. Cash flow per share
  4. EBITDA per share
  5. Dividends per share
59
Q

What is basic EPS formula and use?

A

total amount of net income a company genereates for each common share outstanding

basic eps = (net income - preferred dividends) / weighted average of common shares outstanding

60
Q

What is diluted EPS formula and use?

A

used for EPS that has a complex capital structure

diluted EPS = (net income - preferred dividend) / (weighted average number of shares outstanding + conversion of any in the money options, warrants, and other diluted securities)

61
Q

What is cash flow per share formula and use?

A

operating cash flow on a per-share basis

(CFO - Preferred dividends) / weighted average # of shares outstanding

62
Q

What is EBITDA per share formula and use?

A

EBITDA / weighted average number of shares outstanding

63
Q

What is dividends per share formula and use?

A

measures the amount of dividends on a per share basis.

common dividends declared / weighted average number of common stock outstanding

64
Q

What are the 3 types of dividends related quantities ratios? DRS

A
  1. dividend payout ratio
  2. retention rate
  3. sustainable growth rate
65
Q

What is dividend payout ratio formula and use?

A

measures the percentage of net income that goes to the dividend program.

dividends / net income

66
Q

What is retention rate ratio formula and use?

A

measures the percentage of net income that is retained to grow the business, rather than being paid out as dividends.

1- dividend payout ratio

67
Q

What is sustainable growth rate formula and use?

A

maximum rate of growth that a company or social enterprise can sustain without having to finance growth with additional equity or debt.

retention rate * ROE (ROE = ROA*Leverage Ratio)

68
Q

What is credit risk?

A

risk of loss caused by failure to make a promised payment

69
Q

What is credit analysis?

A

evaluation of a company’s credit worthiness/ credit risk

70
Q

What is the credit rating process?

A

a quantified assessment of a company’s credit worthiness or ability to make debt payments.

71
Q

What are the 7 ratios to measure credit rating? EFFEEDR

A
  1. EBITDA interest coverage
  2. FFO(funds from operations) to debt
  3. Free operating cash flow to debt
  4. EBIT margin
  5. EBITDA margin
  6. Debt to EBITDA
  7. Return on capital
72
Q

What is EBITDA interest coverage formula and use?

A

indicator of how easily a firm can pay the interest on its outstanding debt

EBITDA/ total interest expense

73
Q

What is FFO to debt formula and use?

A

measures of the ability of a company to pay off its debt using only net operating income

FFO/ total debt

74
Q

What is free operating cash flow to debt formula and use?

A

measures how long it would take company to repay its debt if all of its cash flows went to debt repayment.

(CFO - capital expenditures)/ total debt

75
Q

What is EBIT margin formula and use?

A

profitability ratio to measure how efficiently a company converts its revenue into profits before paying interest and taxes.

EBIT/ Total revenues

76
Q

What is EBITDA margin formula and use?

A

measure of a company’s operating profit as a percentage of its revenue.

EBITDA/ Total Revenues

77
Q

What is debt to EBITDA formula and use?

A

measuring the amount of years it would take for a company to pay back its debt

total debt/ EBITDA

78
Q

What is return on capital formula and use?

A

measures the amount of money a company makes that is above the average cost it pays for its debt and equity capital.

EBIT/ Average capital

79
Q

What is DuPoint Analysis?

A

a breakdown of ROE with of 3 or 5 different financial ratios that allows you to see the strengths and weakness of the various components of ROE

80
Q

What is the 3 financial ratios to 3 step dupoint analysis, and what are the formulas to those 3 financial ratios?

A

ROE = net profit margin * asset turnover * financial leverage

ROE = (net income/ revenue) * (revenue/ average total assets) * (average total assets/ average total shareholders equity)

81
Q

What is the 5 financial ratios to 5 step dupoint analysis, and what are the formulas to those 5 financial ratios?

A

ROE = tax burden * asset turnover * financial leverage ratio * interest burden * EBIT margin

ROE = (1- tax rate) * (revenue/ average total assets) * (average total assets/ average shareholders equity) * (EBT/ EBIT) * (operating income/ revenue)

82
Q

What is the simple formula for return on equity and use?

A

measure of how well a company is handling money that shareholders have contributed.

net income / average total equity

83
Q

Is high debt to equity more or less solvent?

A

less solvent, meaning company is using more debt to finance the business.

84
Q

What does equity analysis focus on and what does credit analysis focus on?

A

equity analysis focuses on growth

credit analysis focuses on risk

85
Q

What are 4 limitations to using ratios? HICD

A
  1. heterogenous operations (company operates more than one industry)
  2. inconsistent indications
  3. considerable judgement
  4. different account standards
86
Q

What is regression analysis?

A

a graph that shows the relationship between 2 variables

87
Q

What is an operating segment?

A

unit of company with its own distinct financial information. for instance coke, coke zero, diet coke; all different segments

Financial Reporting & Analysis (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions