Ch 3: Financial Statements Analysis and Financial Models Flashcards
(24 cards)
What is a common-size balance sheet?
computes all accounts as percent of total assets
What is a common size income statement?
computes all line items as percent of sales
What are examples of liquidity ratios?
current, quick, cash
What are examples of leverage ratios?
total debt, debt/equity, equity multiplier
What are examples of coverage ratios?
times interest earned, cash coverage
What does the current ratio (CA/CL) measure?
short term liquidity
What does the quick ratio measure?
how much of firm’s current assets are inventory
What does the inventory turnover ratio measure?
number of times the entire inventory is sold off in the year
What does the days’ sales in inventory measure?
how many days it takes to completely sell your inventory
What does total asset turnover measure?
- amount in sales generated for each $ in assets
- asset use efficiency
What does the profit margin measure?
- how much a firm generates in net income for every $ in assets
- firm’s operating efficiency
- how well it controls costs
What does the return on assets (ROA) measure?
measure of profit per dollar of assets
What does the return on equity (ROE) measure?
measure of how the stockholders fared during the year; amount generated in profit per $ of equity
What does the equity multiplier measure?
firm’s financial leverage
What type of decision is investing in new assets?
capital budgeting
What type of decision determines the degree of financial leverage?
capital structure`
What type of decision determines cash paid to shareholders?
dividend policy
What determines the firm’s liquidity requirements?
NWC decisions
What is the percentage of sales approach? (balance sheet)
- assume all assets (including fixed) vary directly with sales
- accounts payable normally vary directly with sales
- notes payable, LTD, equity generally do not vary w/sales
What is external financing needed? (EFN)
difference between forecasted increase in assets and in liabilities/equity
How is EFN reached for low growth levels?
internal financing
What is the internal growth rate?
how much the firm can grow using retained earnings as the only source of financing (no external financing)
What is the sustainable growth rate?
how much the firm can grow by using internally generated funds and issuing debt to keep a constant debt ratio
What are the determinants of growth?
- profit margin (operating efficiency)
- total asset turnover (asset use efficiency)
- financial leverage (choice of optimal debt ratio)
- dividend policy
