Sec A - Financial Statement Analysis Flashcards
Current Assets include…
Current Assets
(C-M-A-P-I-O)
Cash Marketable Securities Accounts Receivable Prepaid Expenses Inventory Other Current Assets
Current Liabilities include…
Current Liabilities
(A-S-A-P)
Accounts payable
Other Short Term Debt
Accrued Expenses
Current Portion of Long-Term Debt
Quick Assets include…
Quick Assets
(C-M-A)
Cash
Marketable Securities
Accounts Receivable
Current Ratio
Current Ratio =
Current Assets /
Current Liabilities
Quick (Acid-Test) Ratio
Quick (Acid-Test) Ratio =
Quick Assets /
Current Liabilities
- Only liquid assets:
Cash + Marketable Securities + Accts Receivable
More conservative than current ratio
Changes in Liquidity Ratios
Current Assets ⬆️:
Current Ratio ⬆️ Quick Ratio ⬆️ Cash Ratio ⬆️ Cash Flow ⬇️ ‼️ Net Working Capital Ratio ⬆️
Current Liabilities ⬆️:
Current Ratio ⬇️ Quick Ratio ⬇️ Cash Ratio ⬇️ Cash Flow ⬇️ Net Working Capital Ratio ⬇️
How do we define liquidity?
Liquidity is the ability of a company to pay short term applications as the fall due
Degree of Operating Leverage (DOL)
Degree of Operating Leverage (DOL) =
Contribution Margin (CM) / Operating Income (EBIT)
for multiple periods:
% change in Operating Income (EBIT) /
% change in Sales (Revenue)
Degree of Financial Leverage (DFL)
Degree of Financial Leverage (DFL) =
Operating Income (EBIT) / Earnings Before Taxes (EBT)
multiple periods:
% change in Net Income /
% change in Operating Income (EBIT)
Debt to Equity Ratio (DER)
Debt to Equity Ratio (DER) =
Total Debt /
Equity
Interest Coverage Ratio (ICR)
Interest Coverage Ratio (ICR) =
Earnings Before Interest & Taxes (EBIT) /
Interest Expense
Financial Leverage Ratio (FLR)
Financial Leverage Ratio (FLR) =
Assets /
Equity
Long-Term Debt to Equity Ratio
Long-Term Debt to Equity Ratio =
Long-Term Debt /
Equity
Debt to Total Assets Ratio (DTAR)
Debt to Total Assets Ratio (DTAR) =
Total Debt /
Total Assets
Fixed Charge Coverage Ratio (FCCR)
Fixed Charge Coverage Ratio (FCCR) =
Earnings before Fixed Charges & Taxes /
Fixed Charges
Interest Coverage Ratio (ICR)
Interest Coverage Ratio (ICR) =
Earnings Before Interest & Taxes (EBIT) /
Interest Expense
Cash Flow to Fixed Charges (CFFCR)
Cash Flow to Fixed Charges =
Cash flow from operations
+ Fixed Charges
+ Tax Payments /
Fixed Charges
Accounts Receivable Turnover (ARTO)
Accounts Receivable Turnover (ARTO) =
Credit Sales /
Average Gross Accounts Receivable
High ARTO indicates collection efficiency
Inventory Turnover (ITO)
Inventory Turnover (ITO) =
Cost of Goods Sold /
Average Inventory
High ITO indicates sales efficiency
Accounts Payable Turnover (APTO)
Accounts Payable Turnover (APTO) =
Credit Purchases /
Average Accounts Payable
High APTO indicates good short-term liquidity
Days Sales Outstanding in Receivables (DSO)
Days Sales Outstanding in Receivables (DSO) =
365 /
Average Receivable Turnover (ARTO)
or
365 x Average Accounts Receivable /
Credit Sales
Low DSO indicates collection efficiency
Day Sales in Inventory (DSI)
Day Sales in Inventory (DSI) =
365 /
Inventory
or
365 x Average Inventory /
Cost of Goods Sold
Low DSI indicates sales efficiency
Day Purchases in Accounts Payable (DPAP)
Day Purchases in Accounts Payable (DPAP) =
365 /
Accounts Payable Turnover (APTO)
or
365 x Average Accounts Payable /
Purchases on Account
Low DPAP indicates good short-term liquidity
Cash Ratio
Cash Ratio =
Cash + Marketable Securities /
Current Liabilities
Most conservative liquidity ratio
Cash Flow Ratio
Cash Flow Ratio =
Operating Cash Flow /
Current Liabilities
Net Working Capital Ratio
Net Working Capital Ratio =
Current Assets - Current Liabilities /
Total Assets
Working Capital /
Total Assets
Operating Cycle (OC)
Operating Cycle (OC) =
Day Sales in Inventory (DSI) +
Day Sales Outstanding in Receivables (DSO)
The shorter the Operating Cycle the better.
Cash Cycle
Cash Cycle =
Day Sales in Inventory (DSI) +
Day Sales Outstanding in Receivables (DSO) -
Day Purchases in Accounts Payable (DPAP)
or
Operating Cycle -
Day Purchases in Accounts Payable (DPAP)
The shorter the Cash Cycle the better.
Total Assets Turnover (TAT)
Total Assets Turnover (TAT) =
Sales /
Average Total Assets
Measures efficiency of total assets generating sales/revenues.
Fixed Assets Turnover (FAT)
Fixed Assets Turnover (FAT) =
Sales /
Average Net Plant, Property & Equipment
Measures efficiency of fixed assets in generating sales/revenues.
Activity Ratios measure…
Activity Ratios measure the efficiency of a company using its assets and liabilities.
Gross Profit Margin Percentage
Gross Profit Margin Percentage =
Gross Profit /
Sales
Operating Profit Percentage
Operating Profit Percentage =
Operating Income /
Sales
Net Profit Margin Percentage
Net Profit Margin Percentage =
Net Income /
Sales
EBITDA Margin Percentage
EBITDA Margin Percentage =
EBITDA /
Sales
Return on Assets (ROA)
DuPont Model
Return on Assets (ROA) =
Net Income /
Average Total Assets
DuPont Model:
ROA = Net Income x Sales
—————— ————————
Sales Average Assets
^ ^
| |
Profit Total Assets
Margin Turnover
Return on Equity (ROE)
Return on Equity (ROE) =
Net Income /
Average Equity
Return on Common Equity (ROCE)
Return on Common Equity (ROCE) =
Net Income - Preferred Dividends) /
(Average Equity - Average Preferred Equity
Financial Leverage Ratio
aka Equity Multiplier
Financial Leverage Ratio =
ROE / ROA
In general a low equity multiplier indicates the organization is using more equity than debt to finance the purchase of assets
Market-to-Book ratio
Market-to-Book ratio =
Market Price per share /
Book Value per share
Price-Earnings Ratio
Price-Earnings Ratio =
Market Price per share /
Earnings per Share (EPS)
Price to EBITDA Ratio
Price to EBITDA Ratio =
Market Price per share /
EBITDA per share
Book Value per share
Book Value per share =
Total Shareholders’ Equity - Preferred Equity /
Number of Common Shares Outstanding
- Use shares at date of measurement, not weighted average
Basic Earnings per share
Basic Earnings per share =
Net Income - Preferred Dividends /
Weighted Average Common Shares Outstanding
Diluted Earnings per share
Diluted Earnings per share =
Net Income - Preferred Dividends /
Diluted Weighted Average Common Shares Outstanding
Step 1 — Options and warrants first
Step 2 — Effect of convertible bonds and convertible preferred shared
Step 3 — Calculate DEPS by adding most dilutive to least dilutive EPS impact
Diluted Earnings per share (DEPS)
Diluted Earnings per share (DEPS)
STEP 1:
Assume options are exercised, proceeds used to repurchase company stock.
Proceeds from exercise of option = # of shares issued x options price / average price = # of repurchased shares
Number of shares issued from exercise of option
less: number of repurchased shares
= Dilutive effect in shares
STEP 2:
Impact of Convertible Bonds on EPS =
Interest x (1 - Tax Rate) /
Shares to be issued if bonds were converted
Impact of Convertible Preferred Shares on EPS =
Preferred dividends earned (cumulative) or declared (noncumulative) /
Shares to be issued if preferred shares were converted
STEP 3
Calculate DEPS by adding the most dilutive to the least dilutive EPS impact
Earnings Yield
Earnings Yield =
Earnings per share (EPS) /
Market Price per common share
Dividend Yield
Dividend Yield =
Annual Dividends per share /
Market Price per share
Dividend Payout Ratio
Dividend Payout Ratio =
Common Dividend /
Earnings Available to Common Shareholders
Shareholder Return
Shareholder Return =
Ending Stock Price - Beginning Stock Price + Annual Dividend per share /
Beginning Stock Price
Factors to be considered in measuring income
- Estimates
- Accounting Methods
- Disclosure Incentives
- The Different Needs of Users
Revenue recognition
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
Five steps to recognize revenue from a contract:
1) Identify the contract with a customer
2) Identify the performance obligations/promises in the contract
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations in the contract
5) Recognize revenue when (or as) the reporting organization satisfies a performance obligation
Sustainable Growth Rate
Sustainable Growth Rate =
(1 - Dividends Payout Ratio) x
Return on Equity
Accounting profit vs
Economic profit
Accounting Profit =
Accounting Revenue -
Accounting Costs
Economic Profit =
Accounting Revenue -
Accounting Costs -
Opportunity Costs
Determinants and Indicators of Earnings Quality
Determinants and Indicators of Earnings Quality
- The business environment in which the company operates.
- Compliance with GAAP.
- The judgment and reputation of the company’s management.
Book Value Per Share
Book Value Per Share =
Stockholder’s Equity -
Preferred Stock /
Average Shares Outstanding
Market to Book Value Ratio
Market to Book Value Ratio =
Current Stock Price /
Book Value per Share
> 1 means stock is undervalued
<1 means stock is overvalued
Revenue recognition — 3 questions
- Has the risk passed to the buyer?
- Has the seller completed the seller’s portion of the contract?
- Can collectibility be reasonably estimated?
Solvency
Solvency is the ability of a firm to pay long-term debt within the due date.
