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Ratio Analysis Flashcards

1
Q

In ratio analysis, the analyst can:

A

1 Compare ratios for a firm over several years (a time-series comparison).
2 Compare ratios for the firm and other firms in the industry (cross-sectional comparison).
3 Compare ratios to some absolute benchmark.

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2
Q

How is profitability measured? Traditional Approach

A

ROE (Return on equity)

ROE = Profit or loss / Shareholders’ equity

ROE = ROA X Equity multiplier
= Profit or loss / Total assets * Total assets / Equity

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3
Q

What is ROE an indicator of?

A

Profitability

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4
Q

What is the limitation of using ROE?

A

Does not recognize the fact that some of a firm’s liabilities are in essence non-interest-bearing operating liabilities.

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5
Q

What is ROA?

Two formulas

A

Return on Assets

ROA = Profit or loss / Total assets

ROA = Profit or loss / Revenue X Revenue / Total assets

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6
Q

What is asset turnover formula?

A

Revenue / Total assets

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7
Q

What is Equity multiplier?

A

The equity multiplier is a financial leverage ratio that measures the amount of a firm’s assets that are financed by its shareholders by comparing total assets with total shareholder’s equity.

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8
Q

What is Equity multiplier?

A

An equity multiplier is a financial ratio that measures how much of a company’s assets are financed through stockholders’ equity.

Total assets / Equity

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9
Q

Income statement Items

A

1) Interest expense after tax
2) Net investment profit after tax (NIPAT)
3) Net operating profit after tax (NOPAT)

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10
Q

Interest expense after tax formula

A

Interest expense x (1 - Tax rate)

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11
Q

NIPAT

A

Net investment profit after tax = (lnvestment income + Interest income) x (1 - Tax rate)

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12
Q

NOPAT

A

Net operating profit after tax = Profit or loss - Net investment profit after tax + Interest expense after tax

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13
Q

Balance sheet Items

A

1) Operating working capital
2) Net non-current operating assets
3) Non-operating investments
4) Net operating assets
5) Business assets
6) Debt
7) Invested capital

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14
Q

Operating working capital formula

A

(Current assets - Excess cash and cash equivalents) - (Current liabilities -
Current debt and current portion of non-current debt)

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15
Q

Net non -current operating assets

A

Non -current tangible and intangible assets + (Net) derivatives - (Net) deferred tax
liability - Non-interest-bearing non -current liabilities

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16
Q

Non-operating investments

A

Minority equity investments + Other non-operating investments + Excess cash and
cash equivalents

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17
Q

Net operating assets

A

Operating working capital + Net non-current operating assets

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18
Q

Business assets

A

Net operating assets + Non-operating investments

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19
Q

Debt

A

Total interest-bearing non-current liabilities + Current debt and current portion of
non-current debt

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20
Q

Invested capital

A

Debt + Group equity

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21
Q

What is tax shield?

A

A tax shield is a reduction in taxable income for an individual or corporation achieved through claiming allowable deductions such as mortgage interest, medical expenses, charitable donations, amortization, and depreciation.

Formula: amount of the taxable expense X the tax rate.

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22
Q

Alternative ROE formula

A

Return on invested capital + Spread X Financial leverage

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23
Q

Financial leverage formula

A

Debt / Equity

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24
Q

Spread formula

A

Return on invested capital- Effective interest rate

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25
ROIC
Return on invested capital Return on invested capital is a measure of how profitably a company is able to deploy its operating and non-operating assets to generate profits ROIC = NOPAT /Invested Capital + NIPAT/Invested Capital
26
RNOA
``` return on net operating assets (RNOA) ``` RNOA = NOPAT/Revenue X Revenue/Net operating assets
27
NOPAT margin
NOPAT/Revenue measure of how profitable a company's sales are from an operating perspective.
28
Operating asset turnover
Revenue/Net operating assets measures the extent to which a company is able to use its net operating assets to generate revenue.
29
The appropriate benchmark for evaluating return on invested capital is the
weighted average cost of debt | and equity capital, or WACC.
30
WACC formula
``` WACC=(E/V ×Re)+(D/V ​×Rd×(1−Tc)) where: E=Market value of the firm’s equity D=Market value of the firm’s debt V=E+D Re=Cost of equity Rd=Cost of debt Tc=Corporate tax rate​ ```
31
Gross Profit Margin
(Revenue - Cost of sales) / Revenue
32
NOPAT margin
NOPAT margin provides a comprehensive indication of the operating performance of a company because it reflects all operating policies and eliminates the effects of debt policy Net operating profit after tax / Revenue
33
EBITD
EBITDA margin provides similar information, except that it excludes depreciation and amortization expense, a significant non-cash operating expense. Earnings before interest, tax, depreciation and amortization / Revenue
34
Asset turnover may be broken into two primary components:
Working capital management | Non-current asset management
35
Operating working capital
Operating working capital = (Current assets – Excess cash and cash equivalents) – (Current liabilities – Current debt and current portion of non-current debt)
36
Operating working capital-to-sales ratio
Operating working capital / Revenue
37
Operating working capital turnover
Revenue / Operating working capital turnover
38
Trade receivables turnover
Revenue / Trade Receievables
39
Inventories turnover
Cost of sales/Inventories Cost of materials/ Inventories
40
Trade payables turnover
Purchases / Trade Payables Cost of sales / Trade payables Cost of materials / Trade payables Lower the better
41
Days' receivables
Trade receivables / Average revenue per day Trade receivables / (Revenue/360) Lower the better
42
Days' inventories
Inventories / Average cost of sales per day lower
43
Days' payables
Trade payables / Average purchases per day reasonably high
44
Net non-current operating assets
Net non-current operating assets = Total non-current operating assets – Non-interest bearing non-current liabilities
45
Net non−current operating asset turnover
Revenue/Net non−operating assets
46
PP&E turnover
Revenue/ Net property, plant and equipment
47
Cash conversion cycle
Days' inventories + Days' receivables - Days' payables
48
Analysis of leverage can be performed on both current and non-current debts:
Liquidity analysis relates to evaluating current liabilities Solvency analysis relates to longer term liabilities
49
Liquidity Analysis Ratios
Current ratio Quick ratio Cash ratio Operating cash flow ratio
50
Current Ratio
Current assets / Current liabilities
51
Quick Ratio
Cash and marketable securities + Trade receivables (net) / current liability
52
Cash Ratio
Cash and marketable securities / current liabilities
53
Operating Cash flow Ratio
Cash flow from operations / current liabilities
54
Debt and coverage ratios
Liabilities−to−equity ratio Debt−to−equity ratio Debt−to−capital ratio
55
Liabilities−to−equity ratio
Total liabilities. Shareholders' equity
56
Debt−to−equity ratio
(Current debt + Non-current debt) / shareholders' equity
57
Debt−to−capital ratio
("Current debt"+"Non−current debt") / (Current debt+Non−current debt+Shareholders′ equity)
58
Interest Coverage
(Profit or loss + Interest expense after tax) / interest expense (cash flow from operations + interest expense + taxes paid) / interest expense
59
Debt coeverage
(profit or loss + interest and lease expenses * (1- tax rate)) / interest and lease expenses * (1- tax rate) + debt repayment
60
Sustainable growth rate
Sustainable growth rate measures the ability of a firm to maintain its profitability and financial policies ROE x (1 − Dividend payout ratio) Dividend payout ratio = Cash dividends paid / profit or loss
61
Cash from operations
Working capital from operations increase (or + decrease) in trade receivables increase (or + decrease) in inventories increase (or + decrease) in other current assets excluding cash and cash equivalents + increase (or – decrease) in trade payables + increase (or – decrease) in other current liabilities excluding debt

Financial Statement Analysis (1 decks)

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