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Flashcards in FINC 490 Deck (15)
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1

activity

how efficiently is the firm using its assets to
generate sales?

2

debt

how much flexibility does the firm have?

3

profitability

how profitable is the firm?

4

cash flows

are the firm’s cash flows adequate?

5

type of activity ratios

􀌝 Days Inventory Held
􀌝 Days Sales Outstanding
􀌝 Total Asset Turnover

6

Days inventory held

Days inventory held = inventory/daily cost of sales
Meaning: Average days to sell inventory
Bad if ↑ because the firm may have unsalable inventory

7

Days sales outstanding

Days sales outstanding = receivables/daily credit sales
Meaning: Average days to collect receivables
Bad if ↑ because the firm may eventually have a cash flow
problem

8

Total asset turnover

Total asset turnover = sales/total assets
Meaning: sales generated by assets
Bad if ↓ because it means that the firm is using its assets less
efficiently to generate sales

9

debt

Debt = total liabilities/total assets
Meaning: % of firm's assets financed with debt
Bad if ↑ as it means the firm's financial flexibility is ↓

10

Net profit margin

Net profit margin = net income/sales
ANALYSIS STEP 1: Bad if < 0 because the company has
no profit.
ANALYSIS STEP 2: Bad + ↓ because it means the firm has
↓ profitability

11

Cash Flow Statement

Inflows are positive, outflows are negative

12

Operating cash flows

ANALYSIS STEP 1: Bad if < 0 because it means
that the firm is not generating any cash; cash flow
problem
ANALYSIS STEP 2: Bad if + ↓ because it means
that the firm is generating less cash; potential cash
flow problem

13

Investing cash flows

cash from buying (-) or selling (+)
capital assets [spending on long-term assets]
No bad trend

14

Financing cash flows

cash from issuing debt or equity (+),
cash used to pay dividends, pay back debt or buy back stock
(-) [use of credit cards, savings]
! Bad if + for at least the 2 most recent years because it
means the firm is relying on debt, equity, or both to fund
operations

15

Operating + investing cash flows

Bad if < 0 because it means there is a potential cash
flow problem