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Corporate Finance > Ratios > Flashcards

Ratios Flashcards

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1
Q

Economic Value Added (EVA)

A

net income less a charge for the capital employed to produce that income (NI - % x equity)

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2
Q

Cost of Equity Capital (r)

A

the opportunity cost shareholders have in investing in other firms of similar risk and earning a return on their investment. Stock prices reflect expectations about the firm’s profitability spread.

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3
Q

Accounting Profit: Return on Equity

A

Net Income/Net Worth

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4
Q

Spread

A

ROE - Cost of Equity Capital (R)

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5
Q

Operating Efficiency

A

earnings squeezed out of each dollar of sales;= NOPLAT / Sales

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6
Q

Asset Turnover

A

Sales/Total Assets; sales generated from each dollar of assets; measures the asset intensity of a business, the quantity of assets it needs to generate a dollar of sales. Firms with low margins need high asset turnovers to compensate.

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7
Q

Financing decisions

A

assets leveraged by each dollar of equity

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8
Q

ROE (Dupont Formula)

A

ROE = Net Income / SE = Profit Margin x Asset Turnover x Financial Leverage

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9
Q

Profit Margin

A

Net Income / Sales; the earnings squeezed out of each dollar of sales; measures the fraction of each dollar of sales that trickles down through the income statement to profits.

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10
Q

Financial Leverage

A

Assets / SE; the amount of equity used to finance the assets

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11
Q

Firms’ objecitve

A

create value for shareholders

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12
Q

CF

A

Cash Flow

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13
Q

FCF

A

free cash flow

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14
Q

r

A

capital charge

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15
Q

Balance Sheet

A

reflects the state of the company at a point in time; makes a statement about the resources a company uses to operate and how those resources were paid for (uses/sources; investment/financing)- snapshot of a point in time

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16
Q

Assets

A

Current Assets: Cash, Marketable Securities, Receivables, Inventories. Fixed Assets: PP&E, net

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17
Q

Liabilities

A

Current Liabilities: Notes Payable, Accounts Payable, Accrued Expenses, Accrued Taxes. Long-term Liabilities: Long-term Debt

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18
Q

Shareholders’ Equity

A

Common Stock, Retained Earnings

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19
Q

Automatic Sources

A

Interest bearing debts

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20
Q

Market Value

A

price per share

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21
Q

Book Value

A

SH equity / # shares outstanding

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22
Q

investment

A

typically regarding assets; the allocation of current funds for a stream of future benefits: working capital managment and capital budgeting

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23
Q

financing

A

typically regarding liabilities and equity; the acquisition of funds to support current investments (capital structure, term structure, divdend policy)

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24
Q

Cash Account

A

Cash boy + Cash Received - Cash Payments = Cash eoy

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25
Q

A/R Account

A

A/R boy + Sale - Collections = A/R eoy

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26
Q

PP&E Account

A

PP&E boy + CAPEX - Depreciation - Disposals = PP&E eoy

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27
Q

Inventory Account

A

Invy boy + Purchases - COGS = Invy eoy

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28
Q

Accrued Liabilities

A

AL boy + Incurred Exp - Prepayment = AL eoy

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29
Q

Income Tax Payable (Accured Tax)

A

AT boy + Provision Exp - Pymts to IRS = AT eoy

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30
Q

Long-term Debt

A

LTD boy + Borrowings - Repayment of Principal = LTD eoy

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31
Q

Accounts Payable

A

AP boy + Raw Material Purchases - Pymts = AP eoy

32
Q

Retained Earnings

A

Prior years’ SE + NI - Dividends + common stock issued - stock repurchases where NI - dividends = retained earnings

33
Q

Common Stock

A

CS boy + Issuance of stock - Repurchases = CS eoy

34
Q

Net Working Capital

A

Current Assets - Automatic Sources; current assets - non-interest bearing current liabilities

35
Q

Debt

A

all interest-bearing liabilities: Short-term Debt and LTD

36
Q

Net Fixed Assets

A

Gross Fixed Assets (CAPEX) - Accum Depr

37
Q

Income Statement

A

reflects the operations of a company (Rev -Exp) over a period of time. Net income is the “bottom line”; makes a statement about how the company is using its resources to generate profit (or loss) - snapshot of a period of time

38
Q

Cash Flow Statement

A

Reflects the sources and uses of cash of a company over a period of time; measures solvency, or cash available to pay upcoming bills; makes a statement about how a company has used or received cash in the period. - snapshot of a period of time

39
Q

Accural Accounting

A

Recognizes revenue as soon as “the effort required to generate the sale is substantially complete and there is a reasonable certainty that payment will be received.” Profits do NOT equal cash.

40
Q

Cash Flow

A
  • the movement of cash into and out of an account over a period of time- the “bottom line” of a cash flow statement is to reconcile the change in cash over the relevant period- a company generates cash by reducing an asset or increasing a liability; it uses cash by increasing an asset or reducing a liability
41
Q

Derivation of Cash Flow

A

‘îCash + ‘îWorking Current Assets + ‘îNet Fixed Assets = ‘îAutomatic Sources + ‘îDebt + ‘îCommon Stock + ‘îRERecall, ‘îNFA = CAPEX - Depr‘îWorking Capital = ‘îWCA - ‘îAS‘îRE = NI - Div Solving for cash:‘îCash = NI + [Depr - ‘îWC] - [CAPEX] + [‘îDebt + ‘îCS - Div] = NI + [Adjustments] - [CF f Investing] + [CF f Financing]

42
Q

Gross Margin

A

Gross profit / Sales; measures the amount every sales dollar is available to pay for fixed costs and to add to profits.

43
Q

Inventory Turnover

A

COGS / Ending Invy;

44
Q

Debt Ratio

A

Total Liabilities / Total Assets

45
Q

Growth and Trend Analysis

A

measures how the company is performing relative to the overall economy, including inflation, and to the company’s competitors

46
Q

Leverage Ratios

A

Measure the extent of debt financing by the company- Debt ratio- Times interest earned

47
Q

Liquidity Ratios

A

measure of company’s ability to meet its upcoming short-term obligations. Include: current ratio, quick ratio, cash ratio.

48
Q

Cash Ratio

A

(Cash + securities)/Current Liabilities

49
Q

Efficiency Ratio

A

measures how well a company is using its assets. Include: days in invy, collection period, accounts payable DOH, Asset turnover, fixed asset turnover

50
Q

Invy Days-on-hand

A

Ending Invy / (COGS per day)

51
Q

Invy Turnover

A

COGS/Ending Invy

52
Q

Receivables Turnover

A

Credit Sales / AR

53
Q

How to measure how quickly a company is paying its bills? (Accounts Payable days-on-hand)

A

Accounts Payable / (Credit Purchases per day)If purchases are unavailable, use COGS

54
Q

Fixed Asset Turnover

A

Sales / Net PP&E

55
Q

Profitability Ratios

A

measure how effectively management is operating the business. Include: net profit margin, gross margin, operating margin, ROA, ROE, Return on Invested Capital

56
Q

Net profit margin

A

Net Income / Sales

57
Q

Gross Margin

A

Gross profit / sales

58
Q

Operating Margin

A

EBIT / Sales

59
Q

Return on assets

A

Net Income / Assets

60
Q

(Interest bearing) Debt to Capital

A

Debt / (Debt + NW)

61
Q

Times Interest Earned

A

EBIT / Interest

62
Q

EBIAT

A

Earnings before interest after taxes; aka net operating profit less adjusted taxes; the after-tax earnings of the firm as if it were all-equity financed, i.e., if interest = 0.= EBIT x (1 - tax rate)

63
Q

Current and Quick Ratio

A

these ratios measure liquidity, i.e., to what extent a company has access to sufficient cash to meet all of its ongoing needs.

64
Q

Margins

A

these ratios measure the firm’s value added. Firms such as retail stores that add little value to their inputs will work on thin margins, while firms such as chip manufacturers that greatly transform their inputs enjoy much larger margins.

65
Q

A company generates cash by _______ an asset or _______ a liability; it uses cash by ________ an asset or ______ a liability

A

Reducing , Increasing.Increasing , Reducing

66
Q

Net Income vs Cash

A
  • a company can be profitable sans adequate cash- a company can produce lots of products wo having adequate cash: the products become invy until they are sold; production results in cash expenses, but expenses are not changed until an item is sold. - A company can have healthy sales sans adequate cash: sales create receivables, which are turned into cash only upon collection. - Rapid growth doesn’t necessarily result in lots of cash because growth requires invy, fixed asset investment, etc.
67
Q

Acid Test or Quick Ratio

A

[Current assets - Invy] / Current Liabilities

68
Q

Income Statement

A

Sales -COGSGross Profit-R&D Expense-SG&A ExpenseEBIT-Interest Expense Profit before tax-Income TaxNet Income

69
Q

The tax rate is found by:

A

Income Tax / Profit before tax

70
Q

Net Fixed Assets Turnover

A

Sales / NFA

71
Q

Interest Coverage

A

EBIT / Interest

72
Q

Debt Ratio at market

A

Total Liabilities / (Total Liabilities + MV Equity)

73
Q

Capital Turnover

A

aka capital managment = Sales / capital

74
Q

Sustainable Growth - how fast can a firm grow wo increasing its debt ratio?

A

Answer: As fast as its equity is growing organically. Increase in NW = ‘îRE = b x NIGrowth rate of NW = b x NI/NW = b x ROENotes:- To maintain D/E ratio, Debt and NW must both grow at same rate g- If growth g > sustainable growth rate the firm must: Issue new equity so as to maintain D/E ratio, grow more slowly, allow its D/E to rise.

75
Q

The Accrual Method

A

revenue is recognized when earned and expenses are recognized when incurred without regard to the timing of cash receipts and expenditures

76
Q

Maturity of Debt

A

Short term (commercial paper)Medium term (bank loans, medium term paper)Long term (bonds)

Corporate Finance (1 decks)

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