Reading 39: Financial Analysis Techniques

Question 1

Ammortisation is on?

Answer 1

Intangible Assets

Question 2

Retained Earnings = ?

Answer 2

Accumulated Profit

Question 3

Share Capital + Retained Earnings = ?

Answer 3

Book Value/Net Assets/Net Worth

Question 4

Assets = ?

Answer 4

Debt + Equity

Question 5

2 type of ratios?

Answer 5

Pure Ratio & Mixed Ratio

Question 6

What’s a mixed ratio?

Answer 6

Mixed Ratio should have B/S in Average terms. Anything with p&l upon b/s is a mixed ratio.

Question 7

Receivables Turnover = ?

Answer 7

Annual Sales / Average Receivables

= Churning of Debtors

If higher = Receivables low; strict credit terms to debtors, lower sales growth

If lower = Receivables high = Bad debts.

CONC: Balanced or a bit higher

Question 8

Days of sales outstanding = ?

Answer 8

365 / Receivables Turnover

= Average collection period

Higher = Bad Debts
Lower = Strict credit term

CONC: Balanced or a bit lower

Question 9

Inventory Turnover Ratio = ?

Answer 9

COGS / Avg Inventory

= Churning of Inventory

Higher = Inventory low; STOCK OUT problem
Lower = Inventory high; Mis-management

CONC: Balanced or a bit higher

Question 10

Days of inventory on hand = ?

Answer 10

365 / Inventory turnover

= Inventory Holding Period

Higher = Mis-management
Lower = Stock out problem

CONC: Balanced

Question 11

Payables Turnover = ?

Answer 11

Purchases / Avg Trade Payable

= Churning of creditors

Higher = Creditors low; 1) Opting cash discount; 2) Lower credibility
Lower = Creditors high = LIQUIDITY problem

Question 12

Number of Days Payable = ?

Answer 12

365 / Payables Turnover Ratio

= Avg Payment Period

Higher = Liquidity problem
Lower = Lower credibility

Question 13

Asset turnover ratio = ?

Answer 13

Revenue / Avg Total Assets

= to judge efficient utilisation of assets.

Higher = Higher efficiency
Lower = Inefficiency

Question 14

What happens if asset turnover ratio is EXCESSIVELY higher?

Answer 14

= lower asset = lower capacity for future growth.

Question 15

Working Capital Turnover = ?

Answer 15

Revenue / Avg Working Capital

= Utilisation of working capital

Question 15

Current Ratio = ?

Answer 15

Current Assets / Current Liabilities

Higher = CA high = mismanagement
Lower = CL high = liquidity problem

CONC: Balanced or a bit higher

Question 16

Quick Ratio = ?

Answer 16

Cash + Marketable Securities + Receivables / Current Liabilities

CONC: Balanced or a bit higher

Question 17

Other name for Quick Ratio?

Answer 17

Asset Test Ratio

Question 18

Cash Ratio = ?

Answer 18

Current Liabilities

CONC: Balanced or a bit higher

Question 19

Defensive Interval Ratio = ?

Answer 19

Cash + Marketable Securities + Receivables
/
Avg Daily Expenditure

= to find no. of days of average cash expenditure firm could pay by its current liquid assets or quick assets.

Higher = Mismanagement
Lower = Liquidity problem

Question 20

Cash conversion cycle = ?

Answer 20

(Days of Sales Outstanding + Days of Inventories on hand) - No. of days payables

() = Operating Cycle

CONC: Lower is better because it means churning is faster.

Question 21

What is over equity capitalisation?

Answer 21

Using excessive equity capital is known as over equity capitalisation.

Question 22

Debt-to-equity ratio = ?

Answer 22

Total debt /
Total shareholder’s fund

Here, denominator = share cap. , reserves & surplus.
Higher = Debt more; more risk
Lower = Equity more; over equity cap.

CONC: Balanced or a bit lower

Question 23

Explain the following:
Debt to equity ratio is 2.
What is the weight of Debt?

Answer 23

Debt /
Debt + Equity
2
——— = 2/3 = 66.67%
2 + 3

66.67% = wt. of debt
33.33% = wt. of equity

Question 24

Debt-to-Capital Ratio = ?

Answer 24

Total debt / Total debt + Total Shareholder's fund = wt. of debt

Question 25

Debt -to-assets Ratio = ?

Answer 25

Total Debt / Total Assets = what part of assets are funded by debt. CONC: Balanced or a bit lower

Question 26

Debt-to-Assets Ratio is also known as?

Answer 26

DEBT RATIO

Question 27

Financial Leverage = ?

Answer 27

Total Assets / Total Equity Higher = Higher debt Lower = Lower debt CONC: Balanced or a bit lower

Question 28

Another formula for financial leverage?

Answer 28

(1+D/E)

Question 29

Financial Leverage is 1.5, what does this mean?

Answer 29

=1 then - NO debt >1 then - debt So, 1.5 :- 1 (equity) + 0.5 (debt)

Question 30

Interest Coverage Ratio = ?

Answer 30

EBIT / Interest payments = profit available to pay interest CONC: Higher is better

Question 31

Fixed Charge Coverage = ?

Answer 31

EBIT + Lease payments / Interest payments + Lease payments CONC: Higher is better

Question 32

Debt-to-EBITDA Ratio

Answer 32

Total debt / EBITDA CONC: Lower is better

Question 33

Profitability ratios are GENERALLY good when?

Answer 33

When they are higher

Question 34

Net Profit Margin = ?

Answer 34

Net Income / Revenue

Question 35

Gross Profit Margin = ?

Answer 35

Gross profit / Revenue

Question 36

Operating Profit Margin = ?

Answer 36

Operating income / Revenue = EBIT / Revenue

Question 37

Pretax margin = ?

Answer 37

EBT / Revenue

Question 38

Return on Assets (ROA) = ?

Answer 38

Net Income / Avg Total Assets = measure of efficiency w.r.t profit = how much lesser asset is used to generate profit AFTER TAX= NI + (1+t) / Avg Total Assets PRETAX = EBIT / Avg Total Assets

Question 39

Return on Invested Capital (ROIC) = ?

Answer 39

EBIT / Avg Total Capital

Question 40

Return on Equity (ROE) = ?

Answer 40

Net Income / Avg total equity i) ROE on common stock = NI - Preferred dividends / Avg common equity

Question 41

ROE 3 aspect ratio = ?

Answer 41

{(N.I/Sales) x (Sales/TA)} x (TA/Equity) = NI/Equity. = ROA x (1+D/E)

Question 42

ROE 5 aspect ratio = ?

Answer 42

(N.I/Sales) x (Sales/TA) x (TA/Equity) = {(EBIT/Sales) x (EBT/EBIT) x (NI/EBT)} x Sales/TA x TA/Equity = {Operating profit margin X Interest effect X Tax effect} X (Sales/TA) X (TA/Equity)

Question 43

Tax Effect = ?

Answer 43

NI/EBT = EBT - Tax Exp/EBT =EBT/EBT - Tax Exp/EBT = 1-Tax Rate = (1-t)

Question 44

Interest Effect = ?

Answer 44

EBT/EBIT = (EBIT - I) / EBIT = EBIT/EBIT - I/EBIT = 1- I/EBIT = 1 - (1 / Interest Coverage Ratio) because = Interest cvg ratio = EBIT/Interest payment or I.