Financial Statement Analysis

Question 1

How often are US companies required to file their financial statements with the SEC?

Answer 1

-Quarterly (Form 10-Q)
-Annually (Form 10-K)
-Companies must also send an annual report to their shareholders every year

Question 2

What are the main financial statements?

Answer 2

-Balance Sheet
-Income Statement
-Cash Flow Statement
-Statement of Stockholders’ Equity
-Management Discussion and Analysis
-Notes to the Financial Statements

Question 3

What is the purpose of the Management Discussion and Analysis?

Answer 3

-Preface to the financial statements
-Provides a background on the company and any significant events
-Records any off-balance sheet transactions

Question 4

What is the equation for market capitalisation?

Answer 4

Market Capitalisation= Shares Outstanding * Market Price Per Share

Question 5

What is the equation for the market to book ratio?

Answer 5

Market to Book Ratio= (Market Value of Equity)/ (Book Value of Equity)

Question 6

What are firms with low market to book ratios called?

Answer 6

Value Stocks

Question 7

What are firms with high market to book ratios called?

Answer 7

Growth Stocks

Question 8

What is the equation for enterprise value?

Answer 8

Enterprise Value = Market Cap + Debt - Cash

Question 9

What can EV be interpreted as?

Answer 9

The cost to take over the business

Question 10

What are the profitability ratios?

Answer 10

-Gross Margin
-Operating Margin
-EBIT Margin
-Net Profit Margin

Question 11

What is the equation for gross margin?

Answer 11

Gross Margin= (Gross Profit)/ (Sales)

Question 12

What is the equation for operating margin?

Answer 12

Operating Margin= (Operating Income)/ (Sales)

Question 13

What is the equation for EBIT margin?

Answer 13

EBIT Margin = EBIT/ Sales

Question 14

What is the equation for Net Profit Margin?

Answer 14

Net Profit Margin= Net Income/ Sales

Question 15

What are the Liquidity Ratios?

Answer 15

-Current Ratio
-Quick Ratio
-Cash Ratio

Question 16

What is the equation for the Current Ratio?

Answer 16

Current Ratio= Current Assets/ Current Liabilities

Question 17

What is the equation for the Quick Ratio?

Answer 17

Quick Ratio= (Cash + Near Cash Assets) (M1)/ Current Liabilities

Question 18

What is the equation for the Cash Ratio?

Answer 18

Cash Ratio= Cash/ Current Liabilities

Question 19

What is the caveat with liquidity ratios?

Answer 19

-They only consider the firm’s current assets
-If a firm can generate significant cash quickly from its operations it might be highly liquid even if these ratios are poor

Question 20

What are the Working Capital Ratios?

Answer 20

-Accounts Receivable Days
-Accounts Payable Days
-Inventory Days
-Accounts Receivable Turnover
-Accounts Payable Turnover

Question 21

What is the equation for ARD?

Answer 21

Accounts Receivable Days= Accounts Receivable/ Average Daily Sales

Question 22

What is the equation for APD?

Answer 22

Accounts Payable Days = Accounts Payable/Average Daily COGS

Question 23

What is the equation for Inventory Days?

Answer 23

Inventory Days= Inventory/ Average Daily COGS

Question 24

What is the equation for Inventory Turnover?

Answer 24

Inventory Turnover= Annual COGS/ Inventory

Question 25

What is the equation for ART?

Answer 25

Annual Sales/ Accounts Receivable

Question 26

What is the equation for APT?

Answer 26

Annual COGS/ Accounts Payable

Question 27

What are the Interest Coverage Ratios?

Answer 27

-EBIT-Interest Coverage Ratio -EBITDA

Question 28

What is the equation for the EBIT-Interest Coverage Ratio?

Answer 28

EBIT-Interest Coverage Ratio= EBIT/Interest Expense

Question 29

How do you calculate EBITDA?

Answer 29

EBIDTA= Net Income + Depreciation + Amortisation + Tax+Interest

Question 30

What are the Leverage Ratios?

Answer 30

-Debt: Equity Ratio -Debt: Capital Ratio -Net Debt -Debt:EV Ratio -Equity Multiplier

Question 31

What is the equation for the Debt-Equity Ratio?

Answer 31

Debt-Equity Ratio= Total Debt/ Total Equity

Question 32

What is the equation for the Debt-Capital Ratio?

Answer 32

Debt-Capital Ratio= Total Debt/ (Total Equity + Total Debt)

Question 33

What is the equation for Net Debt?

Answer 33

Net Debt= Total Debt- Cash and Short Term Investments

Question 34

What is the equation for the Debt-EV ratio?

Answer 34

Debt-EV Ratio= Net Debt/ (Market Cap + Net Debt)= Net Debt/ EV

Question 35

What is the Equity Multiplier?

Answer 35

Equity Multiplier= Total Assets/ Market Cap

Question 36

What is the main valuation ratio?

Answer 36

-P/E Ratio

Question 37

What is the equation for the P/E Ratio?

Answer 37

-P/E Ratio= Market Cap/ Net Income = Share Price/ Earnings per Share -The value of a stock should be proportional to the level of earnings it can generate -Ceteris Paribus riskier firms have lower P/E -P/E ratios consider the firm's equity so they are sensitive to leverage

Question 38

What are the Operating Returns Ratios?

Answer 38

-Return on Equity (ROE) -Return on Assets (ROA) -Return on Invested Capital

Question 39

What is the equation for ROE?

Answer 39

ROE= Net Income/ Market Cap

Question 40

What is the equation for ROA?

Answer 40

ROA= (Net Income + Interest Expense)/ Book Value of Assets

Question 41

What is the equation for Return on Invested Capital?

Answer 41

Return on Invested Capital= EBIT(1-t)/ (Market Cap+ Net Debt) = EBIT(1-t)/ EV

Question 42

What is the DuPont Identity?

Answer 42

A formula that allows us to break down the return on equity

Question 43

What is the equation for the DuPont Identity?

Answer 43

-ROE= Net Profit Margin* Asset Turnover*Equity Multiplier -ROE= (Net Income/Sales)* (Sales/ TA)*(TA/Market Cap)