Financial Analysis Techniques Flashcards
DuPont 3 way Equation
= (net income/revenue)(revenue/average total assets)(average total assets/equity)
= (net profit margin)(asset turnover)(leverage ratio)
DuPont used for
see what factors are changing return on equity
DuPont 5 way equation
= (net income/EBT)(EBT/EBIT)(EBIT/revenue)(revenue/average assets)(average total assets/equity)
= (tax burden)(interest burden)(EBIT margin)(asset turnover)(leverage ratio)
What is (net income/EBT)?
tax burden equal to (1-tax rate)
What is (EBT/EBIT)?
interest burden
What is (EBIT/revenue)?
EBIT margin
What can EBIT be replaced with in the DuPont Equation?
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
High level of ROE
- high profit margins
- high leverage
- high asset turnover
Why does high levels of leverage not always lead to higher ROE?
- 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
Should the ratio be higher or lower to have a lower interest burden?
the higher the ratio the less interest the company has to pay, better to have a higher ratio
Should the ratio be higher or lower to have a lower tax burden?
the higher the ratio the less taxes the company has to pay, better to have a higher ratio
ROE equation
net income/average equity
Per share ratios for valuation
price to earnings, price to sales, price to cash flow, price to book value per share
P/E ratio
price per share/earnings per share
this ratio is driven by risk and earnings growth
price to sale ratio
price per share/sale per share