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))
