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Sources of Cash Uses of Cash

Source of Cash = generate cash ↓ Debit or ↑ Credit Use of cash = Cash spent/application of cash ↑ Debit or ↓Credit

  • Current Ratio
  • Quick Ratio
  • Cash Ratio
  • Net Working Capital to Total ASsets
  • Interval Measure


Common-Size Statements

Common-Size Statement = presenting all items in %. These are isolated to describe ONLY a particular year -Balance Sheet = % of Assets or %Liabilities+SE -Income Statement = % of Sales (what happened with each dollar of sales, ∴ easier than BS for comparison)


Common-Base Year Statements

Common-Base Year Statements = present all items relative to certain base-year amount -Pattern of operations, comparison good to self-evaluate


Combined Common-Size and Base-Year Analysis

As total assets grow, most other accounts grow too so common size statements often consider this aggregated growth. ∴ Combined Analysis = to isolate growth of a specific account and analyze its trend only 1) Calculate account as a percentage of total (Common-Size)


5 Categories of Financial Ratios

Financial Ratios = relationships determined from financial information and used to compare and investigate relationships -Eliminates size problem by using ratios 1) ST Solvency 2) LT Solvency 3) Asset Management/Turnover 4) Profitability 5) Market Value


Short-Term Solvency Ratios

Short-Term Solvency Ratios= (Liquidity measures) Primary concern is firm's ability to pay bills in SR without stress. Focus on CA and CL.

  • Current Ratio
  • Quick Ratio
  • Cash Ratio
  • Net Working Capital to Total Assets
  • Interval Measure


Long-Term Solvency Ratios

Long-Term Solvency Ratios= (Leverage Ratios) Ability to meet obligations in LR, ability to meet financial leverage

  • Total Debt Ratio
  • Debt-Equity Ratio
  • Equity Multiplier
  • Long-term Debt Ratio
  • Times Interest Earned Ratio
  • Cash Coverage Ratio


Asset Management/Turnover Ratios

Asset Management/Turnover Ratios= (Asset Utilization) how efficiently or intensively a firm uses assets to generate sales

  • Inventory Turnover and Days' Sales Inventory
  • Receivables Turnover and Days' Sales Receivables
  • Net Working Capital Turnover
  • Payables Turnover
  • Asset Turnover Ratios
    • Fixed Asset Turnover
    • Total Asset Turnover


Profitability Ratios

Profitability Ratios=how efficiently a firm uses assets and manages operations, focus on bottom line/net income

  • Profit Margin
  • Return on Assets
  • Return on Equity


Market Value Ratios

Market Value Ratios = Calculated only for public companies

  • Price-Earnings Ratio
    • Price-Earnings Growth Ratio
  • Price-Sales Ratio
  • Market-to-Book Ratio
    • Tobin's Q Ratio
  • Enterprise Value - EBITDA Ratio


DuPont Identity

DuPont Identity = famous way of decomposing ROE into its component parts

-Using it to elicit relationship between ROE and ROA