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Analysis exam > UNIT 6- ANALYSIS FINANCIAL DATA > Flashcards

UNIT 6- ANALYSIS FINANCIAL DATA Flashcards

1
Q

Different types of investors expect different types of analysis

A
  1. Stockholder- expects an increase in the stock invested
  2. Speculator- expects a dividend payment
  3. Bank- expects to receive the interest on the loan given and the loan amortization payment

!!although the types of return expected by different stakeholders can be diverse, the avoidance of risk is the same for all!!

-> therefore, all stakeholders use financial statements analysis to predict those expected returns and their risks

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2
Q

Both CREDITORS AND EQUITY INVESTORS are interested in the company´s future profitability

A

Concern of creditors:

  • Short term liquidity
  • Long term solvency

Concern of equity investors:

  • Profitability
  • Security prices
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3
Q

Financial statements

A
  • Financial statements are used by creditors, investors and managers to establish the company´s financial position
  • Financial health of a business can be measured by simple analysis with ratios
  1. Balance sheet: presents enough data of assets, liabilities and equities
  2. Income statement: gives information about revenues and expenses
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4
Q

Liquidity ratios

A

Liquidity= a company´s ability to meet its maturity short-term obligations

  • To be able to pay all obligations at maturity is very important, especially in times of adversity like strike, recessions, rise in the raw materials prices, etc.
  • If liquidity position is not enough, great financial difficulties may result because the company will not manage to pay bills in time.

WORKING CAPITAL = CURRENT ASSETS- CURRENT LIABILITIES

ACID TEST=
CURRENT ASSETS-INVENTORIES
/
CURRENT LIABILITIES

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5
Q

Working capital ratio

A

Net working capital= the difference between these two concepts and a safety situation to creditors

  • A large amount of net working capital is needed in situations when the business has difficulties borrowing money in short.
  • Having too much money as net working capital indicates losing short-term investment opportunities.
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6
Q

Working capital formula

A

WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

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7
Q

Acid test ratio or quick ratio

A
  • It considers the most liquid assets
  • Thus, inventories are left out of calculations because of the time needed to convert them into cash
  • Prepaid expenses also
  • > they are not convertible into cash so not capable of covering current liabilities
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8
Q

Acid test formula

A

ACID TEST=
CURRENT ASSETS-INVENTORIES
/
CURRENT LIABILITIES

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9
Q

Solvency ratios

A

Solvency= a company´s ability to meet its long-term obligations as they become due
- It focuses on long-term financial and operating structure of the business

  1. Debt ratio
  2. Debt-to-equity ratio
  3. Interest coverage ratio
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10
Q

Debt ratio

A
  • It compares total liabilities and total assets

- Usually expressed as a percentage that shows total funds obtained from creditors

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11
Q

Debt ratio formula

A

DEBT RATIO=
TOTAL LIABILITIES
/
TOTAL ASSETS

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12
Q

Debt-to-equity ratio

A
  • Compares total liabilities to stockholders ‘equity
  • Remarkable measure of solvency: a high degree of debt will make it difficult when payments of interests and principal of bank loans maturity
  • Besides, high level increases the risk of running out of cash during difficult conditions
  • High debt level will also cause less financial flexibility at the time of obtaining resources
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13
Q

Debt-to-equity ratio formula

A

DEBT-TO-EQUITY RATIO=
TOTAL LIABILITIES
/ EQUITY

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14
Q

Interest coverage ratio

A
  • Compares earnings before interest and taxes to the company´s interest expenses
  • Indicates the number of times before-tax earnings cover interest expenses
  • The greater the figure the better
  • Indicates a safety margin showing how much of a decline in earnings a company is able to absorb, or cause less financial flexibility at the time of obtaining resources
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15
Q

Interest coverage ratio formula

A

INTEREST COVERAGE RATIO= EARNINGS BEFORE INTERESTS AND TAXES

/ INTEREST EXPENSE

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16
Q

Profitability ratios

A
  • Good financial health and effectiveness in the management of the company´s ability to earn acceptable profit must be considered as well as return on investment
  • Profit data is little significant if it is not associated to its source or the activities to be made to create revenues
  1. Gross margin profit
  2. Profit margin
  3. Return on total assets (ROA)
  4. Return on investment (ROI)
  5. Mark-up
  6. Invested capital turnover
17
Q

Gross margin profit

A
  • Compares gross profit with net sales
  • The obtained percentage shows how much of each currency unit is remaining after goods were paid
  • The higher the gross profit the better
  • If it is lower than the previous year, the selling price is not according to changes in costs
18
Q

Gross profit margin formula

A

GROSS PROFIT MARGIN= GROSS PROFIT

/ NET SALES

19
Q

Profit margin

A
  • Compares net income with net sales
  • The obtained percentage gives insights to the company´s pricing cost structure and production efficiency
  • If it is decreasing and the gross profit margin is remaining static the expenses are too high
20
Q

Profit margin formula

A

PROFIT MARGIN=
NET INCOME
/
NET SALES

21
Q

Return on total assets (ROA)

A
  • Shows the efficiency with which management uses its resources generating income
  • The average total assets is the difference between total assets at the opening balance sheet and the total assets at the end of the accounting cycle
22
Q

Return on total assets (ROA) formula

A

ROA=
NET INCOME
/
AVERAGE TOTAL ASSETS

23
Q

Return on investment (ROI)

A
  • EBIT: Earnings before interests and taxes
  • Shows the possible return of an investment
  • Does not consider the company´s financial structure
  • ROI can be broken into two basic ratios: Mark-up and Turnover
24
Q

Return on investment (ROI) formula

A

ROI=
EBIT
/
INVESTMENT

25
Q

Mark-up

A
  • EBIT/SALES
  • Measures the ability of sales to create profit
  • Sums up the efficiency of business operations: production, commercial, distribution and management
26
Q

Turnover

A
  • SALES/NET INVESTMENT
  • Measures the efficiency of investment implementation
  • If a company´s assets are higher that its activity needs, an idle capacity and high manufacturing storage and distribution cost will hurt the business
  • If a company´s assets are not enough for its activities, results will be affected

Analysis exam (2 decks)

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