Terms Flashcards
Time-Series Analysis
helps identify trends for a single company or business unit.
Evaluation of Time-Series Analysis. As an analyst, studying a company what would be some areas of interest that would be in sync with this term of evaluation?
- Determining the rate of growth in the companies sales.
- The degree to which its earnings have fluctuated historically with inflation.
- Business cycles
- Foreign currency exchange rate
- Changes in economic growth in domestic and/or foreign markets.
Cross-Sectional Analysis
helps identify the difference similarities and differences across companies or business unit at a single point in time.
Benchmark Comparison
Measures a company’s performance or conditioning against some predetermined standard.
Tangible Net Worth
is usually defined as a total tangible assets minus total liabilities. (Note: Be sure to exclude intangibles such as goodwill, patents, and trademarks.
Common-Size Income Statements
recast each statement item as a percentage of a sale. These statements show how much each sales dollar the company spent on operating expenses and other business costs and how much of each sales dollar hit the bottom line as profit.
Trend Statements
Statements that recast each item as a percentage of a base year number.
Equation: Return on Assets (ROA)
ROA = Net Income / Average Assets = Earnings Before Interest (EBI) [Net Income + Interest Expense x ( 1 - Tax Rate)] / Average Assets
Equation: Disaggregatting ROA into Profit Margin and Asset Turnover
ROA = Earings Before Interest / Average Assets = (EBI /Sales) x (Sales / Average Assets) = Profit Margin x Asset Turnover
Equation: Profit Margin
EBI / Sales = (Sales - COGS - OpEX + Other - Taxes) / Sales
Equation; Asset Turnover
Sales / Average Assets = (Sales / Average Current Assets + Average Long-Term Assets)
Return on Common Equity (ROCE)
Measures a company’s performance in using capital provided by common shareholders to generate earnings.
Equation: Return on Common Equity (ROCE)
(Net Income - Preferred Dividends) / Average Common Shareholder’s Equity
Financial Leverage
Refers to the degree of which the firm finances its operation with debt rather than equity. Debt-to-Capital Ratio
Credit Risk
Refers to the risk of non-payment from the borrower.
Liquidity
Refers to the company’s short-term ability to generate cash for working capital needs and immediate debt repayment needs.
Solvency
Refers to the long-term ability to generate cash internally or form external sources to satisfy plant capacity needs, fuel growth, and repay debt when due.
Equation: Current Ratio
An index of a company’s short-term liquidity. (Current Assets / Current Liabilities)
Equation: Quick Ratio
A more short-term reflection of liquidity. (Cash + Short-term investments + Receivables) / Current Liabilities
Activity Ratios
Tell us how efficiently the company uses its assets. Activity Ratios can highlight efficiencies in asset management - Accounts Receivable, Inventory Levels, and Vendor Payment - and help the company stop areas needing improvement.
Accounts Receivable Turnover Ratio
Is an activity ratio that helps analysis determine whether receivables are excessive when compared to existing levels of credit sales.
Equation: Accounts Receivable Turnover Ratio
Net Credit Sales / Average Accounts Receivable
Equation: Days Accounts Receivable Outstanding
365 Days / Accounts Receivable Turnover
Equation: Inventory Turnover Ratio
Tell us how effectively inventories are managed. Cost of Goods Sold / Average Inventory