Reading 39: Financial Analysis Techniques Flashcards
Ammortisation is on?
Intangible Assets
Retained Earnings = ?
Accumulated Profit
Share Capital + Retained Earnings = ?
Book Value/Net Assets/Net Worth
Assets = ?
Debt + Equity
2 type of ratios?
Pure Ratio & Mixed Ratio
What’s a mixed ratio?
Mixed Ratio should have B/S in Average terms. Anything with p&l upon b/s is a mixed ratio.
Receivables Turnover = ?
Annual Sales / Average Receivables
= Churning of Debtors
If higher = Receivables low; strict credit terms to debtors, lower sales growth
If lower = Receivables high = Bad debts.
CONC: Balanced or a bit higher
Days of sales outstanding = ?
365 / Receivables Turnover
= Average collection period
Higher = Bad Debts
Lower = Strict credit term
CONC: Balanced or a bit lower
Inventory Turnover Ratio = ?
COGS / Avg Inventory
= Churning of Inventory
Higher = Inventory low; STOCK OUT problem
Lower = Inventory high; Mis-management
CONC: Balanced or a bit higher
Days of inventory on hand = ?
365 / Inventory turnover
= Inventory Holding Period
Higher = Mis-management
Lower = Stock out problem
CONC: Balanced
Payables Turnover = ?
Purchases / Avg Trade Payable
= Churning of creditors
Higher = Creditors low; 1) Opting cash discount; 2) Lower credibility
Lower = Creditors high = LIQUIDITY problem
Number of Days Payable = ?
365 / Payables Turnover Ratio
= Avg Payment Period
Higher = Liquidity problem
Lower = Lower credibility
Asset turnover ratio = ?
Revenue / Avg Total Assets
= to judge efficient utilisation of assets.
Higher = Higher efficiency
Lower = Inefficiency
What happens if asset turnover ratio is EXCESSIVELY higher?
= lower asset = lower capacity for future growth.
Working Capital Turnover = ?
Revenue / Avg Working Capital
= Utilisation of working capital
Current Ratio = ?
Current Assets / Current Liabilities
Higher = CA high = mismanagement
Lower = CL high = liquidity problem
CONC: Balanced or a bit higher
Quick Ratio = ?
Cash + Marketable Securities + Receivables / Current Liabilities
CONC: Balanced or a bit higher
Other name for Quick Ratio?
Asset Test Ratio
Cash Ratio = ?
Current Liabilities
CONC: Balanced or a bit higher
Defensive Interval Ratio = ?
Cash + Marketable Securities + Receivables
/
Avg Daily Expenditure
= to find no. of days of average cash expenditure firm could pay by its current liquid assets or quick assets.
Higher = Mismanagement
Lower = Liquidity problem
Cash conversion cycle = ?
(Days of Sales Outstanding + Days of Inventories on hand) - No. of days payables
() = Operating Cycle
CONC: Lower is better because it means churning is faster.
What is over equity capitalisation?
Using excessive equity capital is known as over equity capitalisation.
Debt-to-equity ratio = ?
Total debt /
Total shareholder’s fund
Here, denominator = share cap. , reserves & surplus.
Higher = Debt more; more risk
Lower = Equity more; over equity cap.
CONC: Balanced or a bit lower
Explain the following:
Debt to equity ratio is 2.
What is the weight of Debt?
Debt /
Debt + Equity
2
——— = 2/3 = 66.67%
2 + 3
66.67% = wt. of debt
33.33% = wt. of equity
Debt-to-Capital Ratio = ?
Total debt / Total debt + Total Shareholder’s fund = wt. of debt
Debt -to-assets Ratio = ?
Total Debt / Total Assets
= what part of assets are funded by debt.
CONC: Balanced or a bit lower
Debt-to-Assets Ratio is also known as?
DEBT RATIO
Financial Leverage = ?
Total Assets / Total Equity
Higher = Higher debt
Lower = Lower debt
CONC: Balanced or a bit lower
Another formula for financial leverage?
(1+D/E)
Financial Leverage is 1.5, what does this mean?
=1 then - NO debt
>1 then - debt
So, 1.5 :- 1 (equity) + 0.5 (debt)
Interest Coverage Ratio = ?
EBIT / Interest payments
= profit available to pay interest
CONC: Higher is better
Fixed Charge Coverage = ?
EBIT + Lease payments / Interest payments + Lease payments
CONC: Higher is better
Debt-to-EBITDA Ratio
Total debt / EBITDA
CONC: Lower is better
Profitability ratios are GENERALLY good when?
When they are higher
Net Profit Margin = ?
Net Income / Revenue
Gross Profit Margin = ?
Gross profit / Revenue
Operating Profit Margin = ?
Operating income / Revenue
= EBIT / Revenue
Pretax margin = ?
EBT / Revenue
Return on Assets (ROA) = ?
Net Income / Avg Total Assets
= measure of efficiency w.r.t profit
= how much lesser asset is used to generate profit
AFTER TAX= NI + (1+t) / Avg Total Assets
PRETAX = EBIT / Avg Total Assets
Return on Invested Capital (ROIC) = ?
EBIT / Avg Total Capital
Return on Equity (ROE) = ?
Net Income / Avg total equity
i) ROE on common stock =
NI - Preferred dividends / Avg common equity
ROE 3 aspect ratio = ?
{(N.I/Sales) x (Sales/TA)} x (TA/Equity) = NI/Equity.
= ROA x (1+D/E)
ROE 5 aspect ratio = ?
(N.I/Sales) x (Sales/TA) x (TA/Equity)
= {(EBIT/Sales) x (EBT/EBIT) x (NI/EBT)} x Sales/TA x TA/Equity
= {Operating profit margin X Interest effect X Tax effect} X (Sales/TA) X (TA/Equity)
Tax Effect = ?
NI/EBT
= EBT - Tax Exp/EBT
=EBT/EBT - Tax Exp/EBT
= 1-Tax Rate
= (1-t)
Interest Effect = ?
EBT/EBIT
= (EBIT - I) / EBIT
= EBIT/EBIT - I/EBIT
= 1- I/EBIT
= 1 - (1 / Interest Coverage Ratio)
because = Interest cvg ratio = EBIT/Interest payment or I.
