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Financial Statement Analysis > Ratio Analysis > Flashcards

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
Q

ROIC

A

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
Q

RNOA

A 
return on net
operating assets (RNOA)

RNOA = NOPAT/Revenue X
Revenue/Net operating assets

27
Q

NOPAT margin

A

NOPAT/Revenue

measure of how profitable a company’s sales
are from an operating perspective.

28
Q

Operating asset turnover

A

Revenue/Net operating assets

measures the extent to which a company is able to use its net operating assets to generate revenue.

29
Q

The appropriate benchmark for evaluating return on invested capital is the

A

weighted average cost of debt

and equity capital, or WACC.

30
Q

WACC formula

A 
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
Q

Gross Profit Margin

A

(Revenue - Cost of sales) / Revenue

32
Q

NOPAT margin

A

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
Q

EBITD

A

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
Q

Asset turnover may be broken into two primary components:

A

Working capital management

Non-current asset management

35
Q

Operating working capital

A

Operating working capital
= (Current assets – Excess cash and cash equivalents)
– (Current liabilities – Current debt and current portion of non-current debt)

36
Q

Operating working capital-to-sales ratio

A

Operating working capital / Revenue

37
Q

Operating working capital turnover

A

Revenue / Operating working capital turnover

38
Q

Trade receivables turnover

A

Revenue / Trade Receievables

39
Q

Inventories turnover

A

Cost of sales/Inventories

Cost of materials/ Inventories

40
Q

Trade payables turnover

A

Purchases / Trade Payables

Cost of sales / Trade payables

Cost of materials / Trade payables

Lower the better

41
Q

Days’ receivables

A

Trade receivables / Average
revenue per day

Trade receivables / (Revenue/360)

Lower the better

42
Q

Days’ inventories

A

Inventories / Average
cost of sales per day

lower

43
Q

Days’ payables

A

Trade payables / Average purchases per day

reasonably high

44
Q

Net non-current operating assets

A

Net non-current operating assets
= Total non-current operating assets
– Non-interest bearing non-current liabilities

45
Q

Net non−current operating asset turnover

A

Revenue/Net non−operating assets

46
Q

PP&E turnover

A

Revenue/ Net property, plant and equipment

47
Q

Cash conversion cycle

A

Days’ inventories + Days’ receivables - Days’ payables

48
Q

Analysis of leverage can be performed on both current and non-current debts:

A

Liquidity analysis relates to evaluating current liabilities

Solvency analysis relates to longer term liabilities

49
Q

Liquidity Analysis Ratios

A

Current ratio
Quick ratio
Cash ratio
Operating cash flow ratio

50
Q

Current Ratio

A

Current assets / Current liabilities

51
Q

Quick Ratio

A

Cash and marketable securities + Trade receivables (net) / current liability

52
Q

Cash Ratio

A

Cash and marketable securities / current liabilities

53
Q

Operating Cash flow Ratio

A

Cash flow from operations / current liabilities

54
Q

Debt and coverage ratios

A

Liabilities−to−equity ratio
Debt−to−equity ratio
Debt−to−capital ratio

55
Q

Liabilities−to−equity ratio

A

Total liabilities. Shareholders’ equity

56
Q

Debt−to−equity ratio

A

(Current debt + Non-current debt) / shareholders’ equity

57
Q

Debt−to−capital ratio

A

(“Current debt”+”Non−current debt”) / (Current debt+Non−current debt+Shareholders′ equity)

58
Q

Interest Coverage

A

(Profit or loss + Interest expense after tax) / interest expense

(cash flow from operations + interest expense + taxes paid) / interest expense

59
Q

Debt coeverage

A

(profit or loss + interest and lease expenses * (1- tax rate)) / interest and lease expenses * (1- tax rate) + debt repayment

60
Q

Sustainable growth rate

A

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
Q

Cash from operations

A

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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