Financial Statements Flashcards
List the 3 calculations in the case conversion cycle?
- Day sale outstanding (DSO) - This calculation basically tells us how many days of receivables the company is carrying relative to sales made per day
- DSO= Averge accounts receivables (Beginning AR + Ending AR divided by 2) / Revenue divided by 360
- Days inventory outstanding (DIO) - Another way to think about this is inventory turn-over ratio. So this equation helps us determine how many days it takes to turn over all of the inventory of a company
- DIO - Average Inventory (Beginning Inventory + Ending Inventory divided by 2) / Cost of sales (Cost of goods sold) divided by 360
- Days Payable Outstanding (DPO) - This helps determing how many days a company’s payables were outstanding. If the company is a healthy company, as opposed to the other calculations, you want this one to get larger.
- DPO - Average Payables (Beginning Payables + Ending Payables divided by 2) / Cost of sales (Cost of goods sold) divided by 360
Ideal profit margins?
Market cap >5billion - 7%
smaller market caps - 10% or more
What is the foremost financial trick that companies use to match or exceed their earnings estimates?
Reduce R&D expenditures
The very best companies have:
- plenty of cash
- noncash current assets dropping (invenotries and receivables are kept low)
- Rising current liablities (unpaid bills for which cash is on hadn)
Look in to PEG ratio!
What are some ratios one can calculate from the:
- Balance sheet? (4)
- Balance sheet
- Working capital
- % or AR to sales, growth rate of AR & inventory to sales
- Current, quick and flow ratio
- debt-to-equity
Explain one reason why sales and profits gains may grow greater than 70% but EPS may only rise 42%?
If the company issues new stock that year and since the eqn for EPS is (net income/shares outstanding), the new shares will be in the denominator diluting the EPS?
What does the cash fllow statment do that the other financial statements don’t do?
in the cash flow statement, you’ll notice the various income and expense items that show up are all accounted for when paid
On the other hand, the corporate income statment contains items (like sales, for instance) that have been recorded but not yet paid for
What is the cash conversion cycle?
a combination of 3 different independent calculations that tell us about how well a company is handling its working capital. The cash conversion cylce represents the number of days it takes a company to purchase raw material, convert it into a finished good, sell the finished good to a customer, and receive payment for that product.
Final calculation:
DRO + DIO - DPO = CCC
Important point:
Make sure to track how the growth in accounts receivable and inventory against overall sales growth. You’d like to see this growth rate decline in comparison to sales, but it’s more realistic that the growth rates of accounts receivable, inventories and sales will move roughly in sync
If accounts receivable and inventories rise far faster than sales, or demonstrate a huge one-quarter jump, consider very seriously whether that company is delivering for shareholders. We’ve seen many otherwise healthy small-cap stocks literally fall apart becuase they failed to collect what they were supposedly owed, creating a huge cash-flow drain. Don’t bother with any companies having problems in this arena
Eqn for working capital?
on which financial statement do you find it?
current assets - current liablities
balance sheet
What are some ratios one can calculate from the:
- Income statment? (2)
- Sales growth
- Gross margin, operating margin, profit margin
What is trailing P/E?
Forward P/E?
current market price per share/current earnings per share
current market price per share/projected future 12 months earnings per share
In a low interest environment, what is the average ROE of a company?
10%-12%
Note, new fast growing companies typically have very high ROE like 50% or so. As they mature, this drops
Good summary on Cash Flow Statement:
We stick net income at the top; add back depreciation; pull out all the current assets that aren’t cash (account receivables and inventory); add back all the current liabilities that havent been pain (account payables and accrued expenses) - and we end up with and understanding of flow of cash through operations
Ideally flow ratio is what value?
On what financial statment?
- at or below 1.25 (note: in general larger companies have lower flow ratios bc of their ability to negotiate from strength as opposed to smaller companies. Therefore, don’t punish your small-cap company too much if this is not ideally at 1.25)
- balance sheet
What are the components of the Liabilitites section of the Balance Sheet?
What are the features to look for in a good income statement?
- High revenue growth
- Cost of goods sold figure should be growing no faster than the Revenue line
- Gross margin >40%
- Steady or growing rate of R&D
- A 34%-plus tax rate - Due to previous earnings losses, some companies can carry forward up to a few years of tax credits. While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom line growth. (If comapnies are paying less than 34% per year in taxes, you should tax their income at that rate, to see through to the real growth
- A profit margin above 7% and rising for a company >5bil, or above 10% for smaller market cap
- Issuance of new stock should be for awarding employees via stock options or raising money for appropriate acquisitions, developing a new product or if there was a nice run in the stock price, NOT bc it needed money bc revenue is down
Equation for current ratio?
Which financial statement do you find it on?
- current assets/current liablities
- balance sheet
What are the components of the Asset section of the Balance Sheet?
Name the compnents of the Income Statement?
Name the components of the Cash Flow Statement?
