Analysis and evaluation of financial statements Flashcards
(33 cards)
what is horizontal analysis?
shows the changes between years in the financial data in both absolute numbers and percentage form
places side by side financial information from different years
what is vertical financial statement analysis?
what are the six categories of financial ratios?>
financial ratios
liquidity ratios
efficiency ratios
leverage ratios
coverage ratios
profitability ratios
what are the limitations of financial statement analysis?
- single ratio provides very little information - may be misleading
- industry trends
- changes within the company
- consumer tastes
- economic factors
- technological changes
what are the three types of stock recommendations made by a stock analyst>
buy
neutral sell
what do liquidity rations show?
the speed with which an asset can be converted to cash
describe the ability of a firm to meet its current obligations
how do you calculate current ratio?
current assets/current liabilities
what does the current ratio show?
how many times a company’s current assets can cover its short time liabilities - you want it to be in excess of 1 - they can cover liabilities without borrowing
formula for quick ration
)current assets - inventories)/current liabilities
what does quick ratio measure?
a company’s ability to meet short term obligations without having to liquidate inventory
formula for cash ratio
cash/current liabilties
what does cash ratio measure?
company’s ability to meet short term obligations using its cash and without having to liquidate other assets
what do efficiency ratios describe?
how well a firm is using its investment in various asset classes
formula for total asset turnover formula
sales/total assets
what do leverage ratios describe?
the amount of debt that the firm has used to finance its assets - the lower the gearing ratios the lower the solvency concerns
capital gearing ratio formula?
total debt/(total debt+total equity)
equity gearing ratio formula?
total debt/total equity
what do coverage ratios indicate?
firm’s ability to pay certain expenses, usually financing expense
interest coverage ratio formula
EBIT/interest expense
what do profitability ratios provide a measure for?
the returns a firm is generating
what does interest coverage ratio show?
how many times a company’s operating profit can cover its interest expense - larger value = better debt-servicing ability
gross profit margin formula and meaning
gross profit (sales-cost of sales)/sales
captures profitability
operating profit margin meaning and formula
net operating income/sales
captures profitability free from effect of interest expense and taxes
net profit margin formula and meaning
net income/sales
captures profitability per unit sold when all expenses have been deducted
