All calculations for exam Flashcards
(41 cards)
What is horizontal/trend analysis
Looks at the change in periods of the same item in the financial statements. E.g. the change in cash from period 3 to 2 = (16-19)/19 = -15.8% fall in cash from year 2 to 3
What is vertical analysis
Computing % of the asset item as a whole. e.g sales make up 30% of total assets
How do we work out the trailing 12 months
take the item for the current period + end of year of previous period - beginning of previous period
what is the formula for return on assets ROA
Return on assets (ROA) = Net profit / Total assets
What are the ratios that fall under activity ratios
- Asset turnover or sales efficiency = revenue/total assets
- Fixed asset turnover= revenue/ Fixed assets
- Working capital ratio = Current assets (CA) - Current liabilities (CL)
- Receivables Turnover = Revenue / average Receivables ( if there 2 years of FS)
- Days of receivables outstanding (DRO) = Days in period / Receivables TO also, Days of sales [in receivables] outstanding (DSO)
- inventory turnover ratio = Cost of sales (COS) / Inventory (Inv)
- Days of inventory on hand (DOH) = Days in period / Inventory TO
- Payables TO = Purchases / Payables
- Days of payables outstanding (DPO) = Days in period / Payables TO
for DPO, DOH & DRO we divide 365 days by the ratio to work out the days
what are liquidity ratios
Ratios that look at whether the company has enough to meet its short term obligations
what are liquidity ratio formula
- Current ratio = Current assets / Current liabilities
- Cash ratio = (Cash + ST investments) / Current liabilities
- Quick ratio = Quick assets / Current liabilities
- Quick assets = (Cash + ST investments) + Receivables (excludes invemtory)
- Defensive interval ratio (DIR) = Quick assets / Daily cash expenditures (Daily cash expenditures = Average per day of all expenses (eg, COS, SG&A, R&D, int. exp.) less non-cash expenses and tax expenses)
- Cash conversion cycle (CCC) = Days inventory on hand (DOH) + Days receivables outstanding (DRO) - Days payables outstanding (DPO)
what does the defensive interval ratio measure
The Defensive Interval Ratio (DIR) measures how many days a company can continue to operate using only its liquid assets without needing to access additional cash flows (like revenues or financing). It’s a liquidity ratio that gives insight into a firm’s short-term financial resilience.
what does the current ratio look at
The Current Ratio is another key liquidity ratio, but unlike the Defensive Interval Ratio, it measures a company’s ability to pay all of its short-term obligations (liabilities) using all of its current assets.
what does the cash conversion cycle measure
measures how long it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
what does the solvency ratio assess
The solvency ratio assesses a company’s ability to meet its long-term obligations
what are some examples of solvency ratio
- Debt-to-assets ratio = Total debt / Total assets
- Debt-to-capital ratio = Total debt / (Total debt + Total
equity) - Debt-to-equity ratio = Total debt / Total equity
- (Financial) leverage ratio = Total assets / Total equity
(Total debt = LT debt + ST debt)
what does financial leverage
Financial leverage measures the extent to which a company uses debt to finance its operations and growth. It reflects the balance between debt and equity financing and shows how much a company is relying on borrowed money to generate profits.
what are coverage ratios
Coverage ratios measure a company’s ability to meet its financial obligations, particularly interest and debt repayments. These ratios are key indicators of financial stability and risk, especially from a lender or investor’s perspective.
Coverage ratios to remember
Interest coverage = (EBT + Interest expense) / Interest expense
- Earnings before taxes (EBT) = Net income (NI) + Tax expense
- Fixed charge coverage = (EBT + Int. exp. + Lease expense) / (Int. exp. + Lease expense)
Cash interest coverage = (CFO + Taxes paid + Interest paid) / Interest paid
Cash flow debt coverage = CFO / Total debt
example of cash flow to debt ratio
Thus, the “CFO” here = Net cash from operating activities- Interest paid + Dividends & Interest received
= 8,421 - 766 + (39 + 72) = 7,766
Since Total debt = 5,793 + 20,271 = 26,064,
CF debt coverage = 7,766 / 26,064 = 29.8%
what are activity ratios also known as
Efficiency ratios
Analysis of activity/efficiency ratio
- A higher fixed asset turnover means that that the company is efficiently using their fixed assets to generate sales. Same analysis with asset turnover.
- A higher inventory turnover ratio means inventory is sold and replaced more frequently → efficient use of inventory.
- A higher accounts receivable turnover means the company collects its debts more quickly. because if your divide this number by 365 you get a higher value.
cash conversion cycle
=
analysis of liquidity ratio
current ratio>1= company is liquid and has enough money to meet short term debt.
Quick ratio>1 company has enough money to meet its short term debts. its good for the company. With this ratio we can come with an analysis we can see if the exclusion of inventory makes up a large proportion of a companies assets.
Solvency ratios analysis
debt & coverage ratio analysis
- debt to equity ratio- higher ratio shows the company has a lot of debt.
- interest coverage shows use how well positioned a firm is to cover interest payments of the debt
- coverage ratio that is high can show us that the company is prone to risk
Profitability ratios (return on sales ratio)
- Gross profit margin = Gross profit (GP) / Revenue
- Operating profit margin = Operating profit (OP) / Revenue
- Pretax margin = Earnings before tax (EBT) / Revenue
- Net profit margin = Net profit (NP) / Revenue
Profitability ratios (return on investment ratio)
- Return on assets (ROA) = Net profit / Total assets
- Operating ROA = Operating profit / Total assets
- Return on total capital = Operating profit / (Total debt + Total equity)
- Return on equity (ROE) = Net profit / Total equity
- Return on common equity = (Net profit to shareholders of parent − Preferred dividend) / Common equity
what is dupont analysis and its purpose
evaluate how different aspects of company performance affect profitability as measured by ROE
e.g., determine the reasons for changes in ROE over time for a given company differences in ROE across companies in a given time
