Topic 1 - Financial Statements Analysis & Financial Models Flashcards
In an efficient capital market, stock price returns should reflect what?
reflect all public info. & are the ‘true’ return
what is the formula for EPS?
EPS = (NI / End number of shares)
what is the formula for Debt Ratio?
Debt Ratio = (TA – TE) / TA
firm finances ___% of its assets with debt
what is the formula for Debt/Equity?
Debt/Equity = TD / TE
firm finances ___% of its equity with debt
higher value = more risky firm
what is the formula for Equity Multiplier [EM] ?
Equity Multiplier [EM] = TA / TE = 1 + TD/TE
A higher multiplier indicates more assets are financed by every equity dollar
what is the formula for Times Interest Earned?
Times Interest Earned = EBIT / Interest
what is the formula for Cash Coverage?
Cash Coverage = (EBIT + Depreciation) / Interest
high value not always good, low risk = low return
what is the formula for Total Asset Turnover [TAT]?
Total Asset Turnover [TAT] = Sales / TA
asset efficiency, higher value good
what is the formula for Profit Margin [PM]?
Profit Margin [PM] = Net Income / Sales
Operating efficiency, higher value good
what is the formula for Return on Assets (ROA)?
Return on Assets (ROA) = NI / TA
what is the formula for Return on Equity (ROE)? (3)
Return on Equity (ROE) = NI / TE
ROE = ROA ×EM
ROE = PM ×TAT ×EM
Short-Term Efficiency
what is the formula for Price-Earnings or P/E Ratio (trailing)?
Price-Earnings or P/E Ratio (trailing) = Current share price / most recent EPS
what is the formula for Price/Book (or Market/Book) of equity? what does it measure?
(P/B) = Current share price / Book equity per share
commonly used to measure value of growth opportunities
what is the formula for EBITDA?
EBITDA = EBIT + Depreciation & amortization
what is the formula for Market capitalisation?
Market capitalization = Price per share ×Number of shares outstanding
what is the formula for Enterprise Value (EV)?
Enterprise Value (EV) = Market capitalization + Market value of interest bearing debt – cash
what is the formula for EV Multiple?
EV Multiple = EV / EBITDA
Which accounting line-items vary directly with sales? (4) how do the first 2 impact PM?
- Costs may vary directly with sales (means PM is constant)
- interest expense may vary with the debt level. (If so, the profit margin is not constant)
- Assets
- AP
How is NET income calculated?
Revenue - COGS - Expenses - Depreciation = EBIT - Interest expense = Taxable income - Tax expense = Net Income
when would you expect to see negative EFN eliminated?
when there is sufficiently higher revenue growth
how do increases in PM, TAT, Financial Leverage and Dividend retention affect a firms growth?
- PM: growth increases
- TAT: growth increases
- Financial Leverage: if optimal should have a neutral effect
- Dividend retention: reduces growth
How does higher growth affect NPV?
should increase the NPV, as long as increased growth isn’t achieved through higher risk leading to a higher discount rate.
What does the internal growth rate tell us?
how much a firm can grow its assets using retained earnings as the only source of finance
What is the formula for IGR?
IGR = ROA x b / (1 - (ROA x b))
What does the sustainable growth rate tell us?
how much a firm can grow its assets using internal financing and issuing only enough debt to maintain a constant debt ratio
What is the formula for SGR?
SGR = ROE x b / (1 - (ROE x b))
what allows the SGR to become larger than IGR?
when there is debt financing
when will both SGR and IGR increase?
when the Net income of a firm increases
What happens in actual growth rate is higher than SGR?
the firm will need external financing in the next period
What happens in actual growth rate is lower than SGR?
company is potentially less profitable than it could be
which four factors can increase SRG?
- increase external financing (equity and debt) if +NPV
- Reduce dividend payout
- increase PM (i.e. reduce expenses)
- sell asset surplus to decrease required assets
when is IGR = SGR?
when there is not debt financing
when are IGR and SGR = 0?
when the firm doesn’t retain any funding
when retention ratio increases what is the impact on EFN?
EFN would decline, more internal funding sources available, and it will have to take on more debt to keep the debt/equity ratio constant
