Financial Analysis Techniques

Question 1

DuPont 3 way Equation

Answer 1

= (net income/revenue)(revenue/average total assets)(average total assets/equity)
= (net profit margin)(asset turnover)(leverage ratio)

Question 2

DuPont used for

Answer 2

see what factors are changing return on equity

Question 3

DuPont 5 way equation

Answer 3

= (net income/EBT)(EBT/EBIT)(EBIT/revenue)(revenue/average assets)(average total assets/equity)
= (tax burden)(interest burden)(EBIT margin)(asset turnover)(leverage ratio)

Question 4

What is (net income/EBT)?

Answer 4

tax burden equal to (1-tax rate)

Question 5

What is (EBT/EBIT)?

Answer 5

interest burden

Question 6

What is (EBIT/revenue)?

Answer 6

EBIT margin

Question 7

What can EBIT be replaced with in the DuPont Equation?

Answer 7

operating earnings, so we get (EBT/Operating earnings) which would show the effect of non operating income and interest expense (interest burden) and operating earnings margin as opposed to EBIT margin

Question 8

High level of ROE

Answer 8

• high profit margins
• high leverage
• high asset turnover

Question 9

Why does high levels of leverage not always lead to higher ROE?

Answer 9

• as leverage rises, so does the interest burden. So the good thing about using more leverage can end up being bad if it is used too much because you’ll have to pay more on interest

Question 10

Should the ratio be higher or lower to have a lower interest burden?

Answer 10

the higher the ratio the less interest the company has to pay, better to have a higher ratio

Question 11

Should the ratio be higher or lower to have a lower tax burden?

Answer 11

the higher the ratio the less taxes the company has to pay, better to have a higher ratio

Question 12

ROE equation

Answer 12

net income/average equity

Question 13

Per share ratios for valuation

Answer 13

price to earnings, price to sales, price to cash flow, price to book value per share

Question 14

P/E ratio

Answer 14

price per share/earnings per share

this ratio is driven by risk and earnings growth

Question 15

price to sale ratio

Answer 15

price per share/sale per share

Question 16

Price to Cash Flow ratio

Answer 16

price per share/ cash flow per share

Question 17

Price to Book Value ratio

Answer 17

price per share/ book value per share

• book value of stockholders equity
• compares the market value of the company with its book value

Question 18

Basic EPS equation

Answer 18

(Net income - pref dividends)/ weighted avg # of common shares

Question 19

Diluted EPS equation

Answer 19

income adjusted for dilutive securities/weighted average # common shares

Question 20

CF per share

Answer 20

CFO/weighted avg # shares

Question 21

dilutive securities

Answer 21

anything that could be converted into common shares in the future

Question 22

Diluted EPS

Answer 22

how would the EPS fall if these potentially dilutive securities were converted

Question 23

EBITDA per share

Answer 23

EBITDA/avg #of common shares

Question 24

Dividends per share

Answer 24

common dividends/ weighted avg # of shares

Question 25

Explain Dividend Payout Ratio

Answer 25

ratio of amount paid to common shareholders relative to net income of the company indication of how much money a company is returning to shareholders and how much it is keeping in hand to reinvest

Question 26

Dividend Payout Ratio

Answer 26

dividends declared/ net income available to common

Question 27

Retention Rate (b)

Answer 27

earnings available to common shares-dividends declared/ earnings available to common shares = 1 - dividend payout ratio

Question 28

Sustainable growth rate (g)

Answer 28

b x ROE

Question 29

Explain g

Answer 29

g refers to sustainable growth rate - talks about why companies grow, because we reinvest earnings on new projects and in the company and that generates return on equity - g : this is the growth rate we can maintain without having to raise any external equity capital

Question 30

coefficient of variation

Answer 30

its standard deviation divided by its expected value

Question 31

Credit Analysis

Answer 31

measuring a company's ability to service and repay its debt

Question 32

Interest Coverage ratio

Answer 32

EBIT/interest - how safely we can use earnings to pay interest - higher interest coverage ratio is better

Question 33

Return on Capital

Answer 33

EBIT/ (Debt + Equity) | - earnings that company is generating from its capital structure

Question 34

Debt-to-assets ratio

Answer 34

debt/assets | - want debt to be lower than assets, so lower ratio is better. All about safety if there was a liquidation

Question 35

Z-score

Answer 35

regression used to look at companies likely to go bankrupt

Question 36

Ratios for Credit Analysis

Answer 36

interest coverage ratio, return on capital, debt-to-asset ratio