Chapter 4: financial statement analysis and forecasting 2

Question 1

what are the productivity ratios

Answer 1

1. receivable turnover ratio
2. average collection period (ACP)
3. inventory turnover ratio
4. Average days sales in inventory (ADSi)
5. Fixed asset turnover

Question 2

How do you calculate receivable turnover ratio

Answer 2

revenue / ar

Question 3

how do you calculate average collection period (ACP)

Answer 3

AR/ Avg. daily credit sales

= 365/ receivable turnover

Question 4

how do you calculate inventory turnover ratio

Answer 4

COGS / Inventory

Question 5

how do you calculate average days sales in inventory (ADSI)

Answer 5

inventory / avg daily sales -

365/ inventory turnover

Question 6

how do you calculate fixed asset turnover

Answer 6

sales / net fixed assets

Question 7

what does ACP show

Answer 7

estimates the number of days it takes for a company to collect on its A/R

Question 8

what does receivable turnover show

Answer 8

measure the sales generated by every dollar of receivable

Question 9

what does inventory turnover ratio show

Answer 9

measures the number of times ending inventory was turnover (or sold during the year)

Question 10

what is a danger about inventory turnover ratio

Answer 10

managers often try to improve this ratio when they are close to year end (through inventory reduction strategies )
- ie. cash and carry sales, clearance)

Question 11

what does average days sales in inventory show

Answer 11

estimates the number of days sales tied up in inventory, based on ending inventory values

Question 12

what does fixed asset turnover show

Answer 12

estimates the number of sales produced by each dollar of net fixed assets

Question 13

What do productivity ratios show

Answer 13

measure the company’s ability to generate sale sform its assets
0 excessive investment in assets with little or no increase in sales reduces the rate of return on both assets (roa) and (ROE)

Question 14

What are the liquidity ratios

Answer 14

1. working capital
2. current ratio
3. quick (Acid test)

Question 15

what do liquidity ratios measures

Answer 15

the ability of the company to meet its financial obligations as they mature using liquid (cash or near cash) resources

Question 16

what is the formula for working capital

Answer 16

current assets / total assets

Question 17

what is the formula for current ratio

Answer 17

current assets / current liabilities

Question 18

what is the formula for quick acid test

Answer 18

cash + marketable securities + AR / current liabilities

Question 19

what does working capital show

Answer 19

measures the proportion of total assets invested in current assets
- demonstrates the company’s capital intensity and corporate liquidity

Question 20

what does the current ratio measure

Answer 20

measures the number of dollars of current assets for each dollar of current liabilities

• estimates the capacity of the company to meet its financial obligations as they mature

Question 21

what does the quick acid test show

Answer 21

recognizes that inventories and other current assets may be less liquid and in some cases when they have to be liquidated quickly, can result in cash flows that are less than book value

Question 22

What are the valuation ratios

Answer 22

1. equity book value per share (BVPS)
2. dividend yield
3. trailing price-earnings (p/e)
4. Forward P/E
5. Market-to-book
6. earnings before interest, taxes, depreciation and amortization (EBITDA) multiple

Question 23

how do you calculate equity book value per share (BVPS)

Answer 23

SE / Number of shares

Question 24

how do you calculate dividend yield

Answer 24

dividend per share / price per share

DPS / P

Question 25

How do you calculate the trailing price-earnings (or P/E)

Answer 25

share price / earnings per share

P / EPS

Question 26

how do you calculate forward P/E

Answer 26

share price / estimated earnings per share

P / EEPS

Question 27

how do you calculate market-to-book

Answer 27

share price / book value per share

p / BVPS

Question 28

how do you calculate Earnings before interest, taxes, depreciation and amortization

Answer 28

TEV (total enterprise value) / EBITDA

Question 29

what does equity book value per share show

Answer 29

expresses shareholder’s equity on a per share basis

Question 30

what does the dividend yield show

Answer 30

expresses the dividend payout as a proportion of the current share price

• can be compared to the yield on other investment instruments, such as bonds or the stock of other dividend-paying companies

Question 31

what does trailing price-earnings (p/E) show

Answer 31

an earnings multiple based on the most recent earnings

- often used to estimate the value of a stock

Question 32

what does forward P/E show

Answer 32

an earnings multiple based on forecast earnings per share

• often used to estimate the value of a stock for companies with rapid growth in EPS

low P/E - regarded as value stocks

high p/e - regarded as growth stocks

Question 33

what does the market-to-book show

Answer 33

estimates the dollars of share price per dollar of book value per share

• the degree to which market value per share exceeds BVPS indicates the value that has been added to the co. by management

Question 34

what is the basis for market-to-book

Answer 34

historical cost accounting is the basis for BVPS

Question 35

what does earnings before interest, taxes, depreciation and amortization (EBITDA multiple show

Answer 35

expresses total enterprise value (TEV) for each dollar of operating income or EBITDA

Question 36

What does total enterprise value mean

Answer 36

is an estimate of the market value of the firm