Exam 2 Flashcards by Noelle Smith

Common-size statements

A standardized financial statement presenting all items in percentage terms.

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Common size income statement

Expresses each item as a percentage of total sales
Tells us what happens to each dollar in sales

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Common Size Balance sheet

Expresses each item as a percentage of assets and liabilities/equity

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The role of Financial ratios

Ways of comparing and investigating the relationships between different pieces of financial information

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Financial ratios categories

Liquidity ratios (Short-term solvency)
Financial leverage ratios (Long-term solvency)
Turnover ratios (Asset management)
Profitability ratios
Market value ratios

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Short-term solvency, or liquidity, ratios

The firm’s ability to pay its bills over a short period of time

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Current Ratio Formula

Current Assets/Current liabilities

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Quick (or Acid-Test) Ratio Formula

Current Assests - Inventory/ Current liabilites

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Cash Ratio Formula

Cash/Current liabilities

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Conglomerates

owning more or less unrelated lines of business.

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Problems with Financial statements analysis

There is no underlying theory to help us identify which items or ratios to look at and to guide us in establishing benchmarks

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Do financial statements outside of the US conform to GAAP

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Is profitability strongly affected by the regulatory environment?

Yes, so utilities in different locations can be very similar but show very different profits.

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North American Industry Classification System (NAICS)

(NAICS) = Intended to replace older SIC codes

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Aspirant group

The top firms in their industry

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Standard Industrial Classification (SIC) codes

Four-digit codes established by the U.S. government for statistical reporting purposes

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First digit in an SIC code establishes what?

the general type of business

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Companies beginning with SIC code 602

are mostly commercial banks

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Companies with an SIC code beginning with 6

Firms engaged in finance, insurance, and real estate

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Companies beginning with SIC code 60

Are mostly banks

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An example of a major competitor and natural peer group member in an industry may be scattered across the globe

Ex. Automobile industry

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Peer Group Analysis

Identifying firms similar in the sense that they compete in the same markets, have similar assets, and operate in similar ways

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SIC code

Standard Industrial Classification code

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The website to know

www.reuters.com

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Why evaluate financial statements?

We look at accounting information because we don’t have the market value information

ROE Formula

EAT/Total Equity

MTR

Marginal Tax Rate

Two examples of non-cash expenses

Depreciation & Depletion

IPP

Initial Purchase Price

What is more important accounting or market value?

Market Value

If payout ratio (PR) is 100% then?

there is no room for growth or investment

The two common size statements

- Common size balance sheet - Common Size income statement

Retention Ratio

Things to know about Walmart

- Acid ratio of 1.44 - Quick ratio of .23 - carries a lot of inventory therefore reflecting those ratio numbers

Do public utilities have high or low asset turnover ratio?

high

NPM

Net Profit Margin

Is low NPM favorable for a stock in the future?

NO, a high NPM is considered to be accretive for the valuation of the stock

What does every ratio have?

A numerator & a denominator

What happened to stock dividends during the pandemic?

Stable yet projected to be cut in half

When you buy stock do you want the PE to be high or low

low, because price is what you pay and earnings is what you get

If the expected future growth rate is down then PE is

down

What are margins driven by?

expectations

With selling stock you want a high or low PE?

high

The inverse of a PE

earnings yield

If the growth rate goes up then PE

goes up

If the PE goes up then

Interest goes down

How would the federal government handle a recession?

Cut interest rates

How are markets driven?

By expectations?

When Apply was almost bankrupt what was their PSR

High price of Apple

$180

Current price of Apple

$144

Who did the first Econ metrics?

Prof. William Barbee

Who has the largest Market Cap

Apple

EBITDA

Earnings Before Interest, Taxes, Depreciation, & Amortization

Is it possible for negative free cash flow to be positive for company stock?

Yes if it's a new company and has high capital spending or if it's being invested for future growth

Examples of free cash flow being invested for future growth?

- Walmart had negative Free CF and invested (risky) - KMART had a positive free CF and went bankrupt

Purpose of the DuPont Identity

To break internal equity into 3 parts - operation efficiency - asset use efficiency - financial leverage

Favorable financial leverage

increasing EAT, ROE, & EPS

What brings down the mean reversion growth rate?

competition

It's a well-documented fact that when the mean reversion growth rate is high it...

eventually drops

It's a well-documented fact that when the mean reversion growth rate is low it...

eventually goes up

1st & 2nd Constraint

1 - Basic Math 2 - Growth has to be financed

What does the sustainable growth rate do?

helps firms maximize growth rate if the debt-equity ratio is constant and there's no external equity

External equity example

selling stock

Determinates the sustainable growth rate

ROE (Return on Equity) * RR (Retention Ratio)

Payout Ratio should be high or low?

low

Retention Ratio should be high or low?

high

price to earnings

Depletion

- natural resources - percent of sales - not related to the amount spent

Depreciation

- related to capital expenditures - applies to fixed assets

The government had what type of allowance?

The depletion allowance

When is a low-profit margin considered ok and not bad

Companies having low sales prices but high unit volume

How is operating efficiency measured

As measured by profit margin

How is Asset use efficiency measured

As measured by total asset turnover

Financial leverage is measured by

As measured by the equity multiplier

Why PE varies

Differences in the expected future earnings growth

Trailing earnings is used for

Used for four quarters of earnings

Forward earnings is used to

Project earnings

Two ways to increase the sustainable growth rate

- Anything that increases ROE through the Dupont Identity ( PM x TAT x EM) - Increasing the plowback ratio(retention ratio

The firm has the ability to sustain growth depends on these four factors

1. Profit margin 2. Total asset turnover 3. Financial policy 4. Dividend Policy

Time-Trend Analysis (Time Series)

Using history as a standard

Exam 2 Flashcards

(81 cards)