Flashcards in Mgt 4335-Chapter 12 Deck (17):

1

## T-What is ratio analysis?

### Ratio analysis is the calculation of ratios from data in financial statements.

2

## T-What is the purpose of ratio analysis?

### It is done to identify possible financial strengths or weaknesses.

3

## T-what are 4 important financial ratios?

### Liquidity ratios, profitability ratios, activity ratios, and leverage ratios.

4

## T-What is a typical analysis including? what are 5 steps in basic financial analysis?

###
A typical analysis includes: a study of the operating statements and the trends within, and ratio analysis.

1.Scrutinize historical income statements and balance sheets.

2.Compare historical statements over time.

3.Calculate changes that occur in individual categories from year to year.

4.Determine the change as a percentage.

5.Adjust for inflation.

5

## What is it meant if a company is reporting strong net income growth but negative Cash Flow?

### This would suggest that the company is relying on something other than operations for earnings growth. Maybe from selling off assets or cutting R&D.

6

## Is the company dumping product on its distributors at the end of the year to boost its reported annual sales?

### If so, expect the distributors to return the unordered product the next month, thus drastically cutting the next year's reported sales.

7

## What is common size statements?

### They are income statements and balance sheets in which the dollar figures have been converted into percentages.

8

## What are these common size statements used for?

### To identify trends in each of the categories, such as cost of goods sold as a percentage of sales. For income statement, net sales represent 100%: calculate the percentage for each categories sum to the net sales represent 100%.

9

## Why do you convert statements to this form (common-size form)?

### It is relatively easy to note the percentage that each category represents of the total. Look for trends in specific items, such as cost of goods sold, when compared to the company's historical figures.

10

## What is Z-Value Bankruptcy Formula used for?

###
Combines 5 ratios: Z= 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5

x1= Working capital/Total assets

x2= Retained earnings/Total assets

x3= Earnings before interest and taxes/Total assets

x4= Market value of equity/Total liabilities

x5= Sales/Total assets (number of times)

Below 1.81 indicates significant credit problems, above 3 indicates a healthy firm.

11

## What is index of sustainable growth?

### It is useful to learn whether a company embarking on a growth strategy will need to take on debt to fund this growth.

12

## TT-What is balanced scorecard?

### It is a method of evaluating a firm's performance using performance measures from the perspective of: customers perspective, internal perspective, innovation & learning perspective, and financial perspective.

13

## T-What are short term liquidity ratios meant?

###
1. Current ratio: the proportion of current assets available to cover current liabilities.

In theory, the higher the current ratio, the better.

A current ratio higher than industry average is an indicator of efficiency.

2. Quick ratio: further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities.

The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

14

## T-What is financial profitability ratio meant?

###
Profit margin: how likely it is that company turn a profit, as well as how that profit relates to other important information about the company.

In general, the higher the profit margin, the better.

Can be thought of as the amount of profit a company keeps per dollar of revenue. However, should be compared to company's past levels, to the market average, and to its competitors.

15

## T-What is financial activity ratio meant?

###
Receivable turnover ratio: a liquidity ratio that measures a company's ability to collect on debts and accounts owed to it.

The ratio represents the number of times in the period that the payments owed to a company will be collected.

A higher number means that the company collects more frequently (good liquidity), whereas a low ratio may mean that clients are not paying up in a timely manner. Like most ratios, the true value of the information isn't really there unless you make a comparison across the industry.

16

## T-What is financial leverage ratio meant?

###
Total debt to total asset ratio: used to determine how many of a company's assets were paid for with debt.

As a general rule, a number close to zero is generally better, because it means more assets were paid for without debt.

But again, it will depend on the industry, as those with highly capital intensive operations will have a higher relative debt level.

17