IB Chapter 4 Financial Statements Flashcards
(25 cards)
What are some common SEC documents used in IB
10-K (annual report), 10Q (quarterly report), 8K (current report), Schedule 14A(proxy statement), S1 and S4( registration statements, Schedule 13-D and Schedule 13-F
What is a Schedule 14A?
The Schedule 14‐A or Definitive Proxy Statement
is issued to shareholders and filed Financial Statement Analysis 151 with the SEC in order to provide information on matters subject to vote at
the company’s annual shareholder meeting.
What are the Registration Statements?
The Form S‐1, or Basic Registration Statement, is filed in connection with the offering of public securities. The S‐1 is typically a lengthy document that contains a variety of business, financial, and legal information about a company. It is the early version of the prospectus and serves to inform potential investors about the stock. The S‐4 is filed when a company is going to issue public securities due to a business combination (merger or acquisition) or an exchange offer.
What are Schedule 13-D and Schedule-F?
A Schedule 13‐D is filed by investors of a company, rather than by the company itself. The 13‐D requires the investor to disclose his or her “intentions” for owning shares in the company.
What is some of the key information in a 10-K
General business overview which includes information on business segments, operations, risk factors etc. The 10-K includes the three financial statements and footnotes to those statements and management discussion
What is the difference between a 10-K and a 10-Q?
10-K is longer and contains more information and its financial statements are audited while the 10-Q´s financial statements are unaudited. The 10-K reflects and annual report, filed once a year while the 10-Q is filed three times per year
Key ratios used to analyze financial statements
Growth statistics: revenue growth
Profitability ratios: Gross margin, EBIT margin, Net income margin
Return Ratios: ROA, ROE and ROIC
Credit Ratios: leverage ratios, interest cover ratios
Activity Ratios: days sales of inventory and accounts receivable
How would you calculate average revenue growth over the past five years?
Also known as Compound Annual Growth Rate (CAGR)
Why might one company have higher net income margin than another?
One company might have higher net income margin than another if
it has higher EBIT margins, lower interest expense, or a lower effective
tax rate.
Which return ratio is best to use when comparing companies that have
different capital structures?
Return on Invested Capital (ROIC) is the best return ratio to use when comparing companies that have different capital structures because ROIC is neutral of capital structure.
The forumla is EBIT(1-tc)/ Total Assets - Cash - Current liabilities + Current Debt
Would a company prefer to have a high leverage ratio or a high interest
coverage ratio?
A company would prefer to have a higher interest coverage ratio because it reflects more cash flow relative to interest expense, thus more
cash cushion. A higher leverage ratio reflects more debt relative to cash
flow.
What are some important examples of credit ratios?
Some examples of credit ratios include debt to equity ratio, debt to
total capitalization ratio, leverage ratios, and interest coverage ratios.
For the last two we want to use EBITDA/ denominator
What are the different return ratios used by bankers?
Some of the return ratios used by bankers include return on assets
(ROA), return on equity (ROE), and return on invested capital (ROIC).
Which is better for a company, higher days sales of inventory or lower,
and why?
It is better for a company to have a lower value for days sales of inventory because it reflects less money tied up financing inventory.
However, if the inventory levels gets too low it may introduce risk into the company’s production.
Formula is Inventory/COGS *360
How do you calculate accounts receivable days?
You calculate accounts receivable days by dividing accounts receivables by revenue and multiplying by 360 or 365.
Which is better for a company, higher accounts payable days or lower,
and why?
It is better to have higher accounts payable days because then the firm´s vendors are helping to finance the firm, however too high value can indicate financial distress and can result in suppliers stopping selling to the firm
Accounts Payables / COGS *360
What are the common time periods used to analyze financial statements
Full fiscal year, Last Twelve Months (LTM) and projected fiscal periods
How do you calculate LTM
adding an income statement or cash flow statement value for the most recent full fiscal year to the value of the most recent Year to Date (YTD) period and substracting the corresponding value from last year´s equivalent YTD period
What is Calendarization and why do we use it
Calendarization is when you adjust the company´s fiscal year to approximate another company´s fiscal year.
How to you calendarize financials
multiply the financial results for Year 1 by the percentage of the year that overlaps with the base fiscal year. Then multiply the results for Year 2 by the % of that year that overlaps with the base fiscal year, if we add the two figures it approximates the firm´s base fiscal year. It is done to have a good comparison between firms when industry conditions have changed
Indications of a distressed firm
low interest coverage ratios, high leverage ratios, poor revenue, or cash flows , higher accounts payable days and declining cash on balance sheet
How do we find non-recurring items?
These can be found in the income statement, footnotes of the same, the MD&A section in 10K and 10Q, press release, equity research reports etc.
Examples of non-recurring items
restructuring costs such as severance (benefits to an employee upon being fired), gains or losses from litigation, costs from man made disasters, stolen assets etc.
What to look out for when adjusting non-recurring items
We should look at the time period, whether item was cost or income, whether it was operating or non operating and if it was disclosed pre tax or post tax
