ratio overview Flashcards
What is a time-series comparison in ratio analysis?
Comparing ratios with prior periods to identify changes in performance and detect underlying causes.
Flashcard 2: Abnormal vs. Normal Ratios
Q: What is the purpose of identifying normal vs. abnormal changes in ratios?
Flashcard 17: Key Takeaways from Ratio Analysis
Q: What are the key takeaways from ratio analysis?
A: Ratios measure profitability, growth, and risk, and they tend to mean-revert, helping in forecasting future performance.
A: Helps detect changes in performance and determine structural shifts in a company’s operations.
Flashcard 3: Cross-Sectional Comparison
Q: What is a cross-sectional comparison in ratio analysis?
A: Comparing a firm’s ratios with competitors, also known as comparative analysis (or comps)
Flashcard 4: Ratio Mean Reversion
Q: What does it mean when ratios tend to mean-revert?
A: Unusually high ratios tend to fall, and unusually low ratios tend to rise, but the speed and completeness depend on the ratio and firm
Flashcard 5: Common-Size Statements
Q: What are common-size financial statements?
A: Financial statements where all accounts are expressed as a percentage of a common denominator, like revenue for I/S and assets for B/S.
Flashcard 6: Vertical Income Statement
Q: What is a vertical income statement?
A: An income statement where all amounts are expressed as a percentage of sales to analyze cost allocation.
Flashcard 7: Vertical Balance Sheet
Q: What is a vertical balance sheet?
A: A balance sheet where all amounts are expressed as a percentage of total assets to assess account sizes relative to firm size.
Flashcard 8: Advantages of Common-Size Statements
Q: What are the benefits of common-size statements?
A: They allow comparisons over time, between firms, and across different currencies while controlling for firm size
Flashcard 9: Horizontal Financial Statements
Q: What are common size horizontal financial statements?
Amounts are expressed as a percentage of a base year (fixed or rolling)*Focus is on growth in each item over time
Flashcard 10: Growth Ratios
Q: How is sales growth measured?
A: By comparing year-over-year sales changes, noting that sales growth tends to mean-revert quickly.
Flashcard 11: ROE Formula
Q: How is Return on Equity (ROE) calculated?
A: ROE = Net Income / Average Common Equity.
Flashcard 12: Profitability Ratios
Q: What is the gross margin formula?
A: Gross Margin = (Sales - COGS) / Sales.
Flashcard 13: EBITDA Margin
Q: What is EBITDA margin and why is it important?
A: EBITDA Margin = EBITDA / Sales, used for firms where production is not the key driver.
Flashcard 14: Turnover Ratios
Q: What is PP&E turnover and why is it used?
A: PP&E Turnover = Sales / Average Net PP&E, measuring efficiency in using fixed assets.
Flashcard 15: Cash Conversion Cycle (CCC)
Q: How is the cash conversion cycle calculated?
A: CCC = Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) - Days Payable Outstanding (DPO).
Flashcard 16: Caveats of Ratio Analysis
Q: What are some caveats of ratio analysis?
A: Ratios don’t provide direct answers, require deeper investigation, and can be manipulated by managers.
Flashcard 17: Key Takeaways from Ratio Analysis
Q: What are the key takeaways from ratio analysis?
A: Ratios measure profitability, growth, and risk, and they tend to mean-revert, helping in forecasting future performance.
Days Sales Outstanding (DSO)
Q: What is DSO and how is it calculated?
A: DSO = 365 / (Sales / Average Receivables), measuring the average number of days it takes to collect receivables.
Days Inventory Outstanding (DIO)
Q: What is DIO and how is it calculated?
A: DIO = 365 / (COGS / Average Inventory), measuring the average number of days inventory is held before being sold.
Days Payable Outstanding (DPO)
Q: What is DPO and how is it calculated?
A: DPO = 365 / (Purchases / Average Accounts Payable), measuring the average number of days a company takes to pay its suppliers.
Q: How should financial performance be evaluated over a period (e.g., year or quarter)?
A:
Use I/S accounts from that period.
Use time-weighted B/S, typically averaging beginning and ending balances
Q: What are the arguments for using the ending balance in financial analysis?
A:
Provides one more year of data.
Easier to calculate and consistent over long time-series.
More timely for reflecting financial changes.
