Module 2 Flashcards
After studying this chapter, you should be able to: 1. Tell how to standardize financial statements for comparison purposes 2. Calculate and interpret some common ratios 3. Analyze the determinants of a firm’s profitability. Identify some of the problems and pitfalls in financial statement analysis.
Sources of Cash
Activities that bring in cash (i.e. selling product, an asset, or a security)
Uses of Cash
Activities that involve spending cash (i.e. paying for materials and labor to produce a product and in purchasing assets; payments to creditors and owners)
Common-Size Balance Sheets
Express each item as a percentage of total assets
Common-Size Income Statements
Express each item as a percentage of total sales
What are the five groups of Financial Ratios?
- Short-term solvency or liquidity
- Long-term solvency or financial leverage
- Asset Management or turnover
- Profitability
- Market Value
What are the Short-term Solvency or Liquidity Ratios?
Current Ratio Quick Ratio (Acid Test) Cash Ratio Net Working Capital to Total Assets Interval Measure
Current Ratio
= Current Assets / Current Liabilities
Quick Ratio (Acid Test)
= Current Assets - Inventory / Current Liabilities
Cash Ratio
= Cash / Current Liabilities
Net Working Capital to Total Assets
= Net Working Capital / Total Assets
Interval Measure
= Current Assets / Average Daily Operating Costs
What are the Long-term Solvency or Financial Leverage Ratios?
Total Debt Ratio Debt-Equity Ratio Equity Multiplier Long-term Debt Ratio Times Interest Earned Ratio Cash Coverage Ratio
Total Debt Ratio
= Total Assets - Total Equity / Total Assets
Debt-Equity Ratio
= Total Debt / Total Equity
Equity Mulitplier
= Total Assets / Total Equity
Long-term Debt Ratio
= Long-term Debt / Long-term Debt + Total Equity
Times Interest Earned Ratio
= EBIT / Interest
Cash Coverage Ratio
= EBIT + Depreciation / Interest
What are the Asset Management or Turnover Ratios?
Inventory Turnover Days' Sales in Inventory Receivables Turnover Days' Sales In Inventory NWC Turnover Fixed Asset Turnover Total Asset Turnover
Inventory Turnover
= CoGS / Inventory
Days’ Sales in Inventory
= 365 Days / Inventory Turnover
NWC Turnover
= Sales / NWC
Fixed Asset Turnover
= Sales / Net Fixed Assets
Total Asset Turnover
= Sales / Total Assets
Also
= ROA / Profit Margin
What are the Profitability Ratios?
Profit Margin
Return on Assets
Return on Equity
Profit Margin
= Net Income / Sales
Return on Assets
= Net Income / Total Assets
Also
= Profit Margin * Asset Turnover Ratio
Return on Equity
= Net Income / Total Equity
What are the Market Value Ratios?
Price-Earnings Ratio
Price-Sales Ratio
Market -to-Book Ratio
Enterprise Value-EBITDA Ratio
Price-Earnings Ratio
= Price per Share / Earnings per Share
Price-Sales Ratio
= Price per Share / Sales per Share
Market-to-Book Ratio
= Market Value per Share / Book Value per Share
Enterprise Value-EBITDA Ratio
= Total Market Value of the Stock + Book Value of all Liabilities - Cash
EBITDA Ratio
= Enterprise Value / EBITDA
The DuPont Identity
Breaks ROE into three parts:
Operating Efficiency
Asset Use Efficiency
Financial Leverage
DuPont Identity Equation
= (Net Income Sales / Sales) * (Sales / Assets) * (Assets / Total Equity)
Also
= Profit Margin * Total Asset Turnover * Equity Multiplier
What are internal uses of Financial Statement Information?
Performance Evaluation, Multiple Division firms compare the performance of those divisions, planning for the future
What are external uses of Financial Statement Information?
Evaluation of suppliers, evaluation of competitors, acquisition of another firm, evaluation of outside parties
What are the two ways in choosing a Benchmark?
Time Trend Analysis & Peer Group Analysis
What are Standard Industrial Classification (SIC) Codes?
Four-digit codes established by the US government for statistical reporting
