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Financial Analysis > Session 2 > Flashcards

Session 2 Flashcards

1
Q

How do you calculate working capital?

A

Working Capital: (shareholders equity + non-recurring liabilities) - non-recurring assets

OR

Working Capital: (shareholders equity + the long-term loans) - the fixed assets

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2
Q

What does it mean that a company has negative working capital?

A

It means that the company does not have great short term liquidity and the company needs to be taken into account based on their industry and economic activity.

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3
Q

How do you calculate working capital?

A

Current assets(Except cash)-Current Liabilities (Except bank overdrafts)

OR

Accounts Receivable + Inventory
- Accounts Payable
AR + I - AP

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4
Q

Why do Americans only have one working capital?

A

Working capital is long term analysis.

The operating Working capital is short term.

Seeing Americans only look at the short term horizon, they do not distinguish the two and call OWC the WC.

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5
Q

What does the Operating Working Capital represent?

A

It indicates the power relationships and strategic positions

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6
Q

How does OWC show power relationships?

A

If people trust you will pay because you are a strong player, you will have more accounts payable.

If not the suppliers will push you to pay before.

Same thing with customers. If you can force the retailers to pay in advance is because they need you more than you need them => lower accounts receivable

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7
Q

What does it mean if your Operating Working Capital is above Zero (OWC > 0)?

A

The business needs the related amount to supplement the financing of its operations (Most frequent case)

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8
Q

What does it mean if your Operating Working Capital is equal to Zero (OWC = 0) ?

A

The company has a good turnover of stocks, short duration of accounts receivable, longer duration of accounts payable.

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9
Q

What does it mean if your Operating Working Capital is below Zero (OWC < 0)?

A

⇒ A favorable strategic factor for the development of the growth policy.

⇒ A sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis)

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10
Q

What do the turnover ratios describe?

A

3 ratios describe the short term policy of the company

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11
Q

What are the three turnover ratios?

A

Accounts Receivable Turnover ratio (DSO)

Accounts Payable Turnover ratio (DPO)

Inventory Turnover ratio (DIO)

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12
Q

How do you calculate the Accounts Payable Turnover ratio (DPO) ?

A

[Accounts Payable / Cost of Sales or Purchases (incl. VAT)] × 365

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13
Q

How do you calculate the Accounts Receivable Turnover ratio (DSO) ?

A

[Accounts receivable / Sales (incl. VAT)] × 365

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14
Q

How do you calculate the Inventory Turnover ratio (DIO)?

A

[Inventory / Sales (excl. VAT)] × 365

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15
Q

When do we use the AR turnover ratio (DSO)?

A

We want to know how long do customers take to pay us.

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16
Q

When do we use the AP turnover ratio (DPO)?

A

When we want to know Duration of payment of the suppliers’ liabilities

17
Q

When do we use the Inventory turnover ratio (DIO)?

A

Duration for the company to sell its inventory

18
Q

How do we calculate the Cash Conversion Cycle (CCC) ?

A

Days of inventory
+Days of Accounts Receivable
– Days of Accounts Payable

DIO+DSO-DPO

19
Q

What does the Cash Conversion Cycle (CCC) tell us?

A

The number of days it takes for a company to turn its resource inputs into cash.

20
Q

What are the three income elements?

A

Operating income

Financial income

No recurring items

21
Q

What is Operating income?

A

The difference between operational activities costs and revenues.

The income derived from the main business activity (operating cycle)

The most relevant indicator of the profitability of a company.

22
Q

What is Financial income?

A

The result that follows the modes of financing business activities

It represents the cost of financing

Highlights the financial burden of the business

23
Q

What is Non-recurring income?

A

Derived essentially from the sales of some fixed assets

basically independent from operating activities

24
Q

What are common size financial statements?

A

Income statement items expressed in % of sales (dividing each item amount by the sales)

25
Q

What are common size financial statements used for?

A

they provide a quick and comprehensive look and a consistent means of comparison between companies of different sizes

26
Q

How do you calculate the growth of net sales ?

A

(Net Sales 2 - Net Sales 1)/Net Sales 1

(NS2 - NS1)/NS1

27
Q

How do you calculate Gross profit?

A

Revenue - Cost of Goods Sold

28
Q

What are the categories of Cashflows?

A

⇒ operating activities

⇒ investing activities

⇒ financing activities

29
Q

How do you calculate cashflows for Operating activities?

A

Net income
+ Non cash expenses
- Non cash Gains
- Change in OWC

30
Q

How do you calculate cashflows for Investing activities?

A

-Acquisition of fixed assets
+ Disposal of fixed assets

31
Q

How do you calculate cashflows for Financing activities?

A

+ Issuance of equity (stocks)
+ Cash from loans
- Repayment of loans
- Repurchase of stocks
- Dividends paid

32
Q

How do you calculate net cashflows

A

+Operating cashflows
+Investing cashflows
+Financing cashflows

33
Q

What is the relationship between cash and profit?

A

A company can make profits with little cash It may have liquidities without making a profit.

OR the company can have slim profits but make a lot of cash and then invest it.

In the income statement, some of the costs and revenues are not paid in cash.

34
Q

What is the Short-term horizon of the Cash vs Profit dynamic?

A

The company can have a net loss for a quarter without causing irreparable harm.

However, if the company runs out of cash, it will face a highly problematic situation

35
Q

What is the Short-term horizon of the Cash vs Profit dynamic? For FAMILY business

A

Cash Flow is critical as it permits growth and as it goes along with the patient capital of the families who are owners and who look for longer term investments.

36
Q

What is the Short-term horizon of the Cash vs Profit dynamic? For NON-FAMILY business

A

Profits and Earnings Per Share are critical for long term success

Financial Analysis (3 decks)

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