SLIDES WEEK 7 Flashcards
(19 cards)
statement of cashflows
CF operating
CF financing
CF investing
= net change in cash
+ cash at the beginning of the period
= cash at the end of the period
why do we use cashflows
- help investors predict future cash flows
- signals corporations ability to meet obligations and pay dividends
- helps investors understand changes in non current assets and liabilities
- explains difference between change in value because of the firms operations and change in cash because of the firms operations
investing activities
changes in investments and non current assets
financing activities
changes in non current liabilities and equity
operating activities
income statement items (revenues and sales)
changes in current assets and current liabilities
why do people use financial statements, to answer what kind of questions
Should I buy (or sell) shares of this firm?
* Should I lend money to this firm?
* Should I use this firm as a supplier?
* Should I sell on account to this firm? * Etc.
Common tools of financial statement analysis
Horizontal analysis
Vertical analysis
Ratio analysis
Horizontal analysis (trend analysis)
Vertical analysis shows each item in a financial statement as a percentage of a base amount.
In the income statement, the base is usually Net Sales Revenue (100%).
Each other item is shown as a percentage of sales.
It helps you compare companies of different sizes.
It shows how much of sales is used for COGS, expenses, taxes, etc.
It makes it easy to spot trends
DUS: Vertical analysis shows how efficiently a company turns sales into profit and helps you compare performance across time or between companies.
Ratio analysis
Ratio analysis uses numbers from financial statements to evaluate a company’s performance, financial health, and efficiency — and compare it over time or with other companies.
How Ratios Are Expressed:
Percentage (e.g. Return on Sales = 10%)
Rate (e.g. 0.1 times)
Proportion (e.g. 1:10)
Main Categories of Ratios:
Performance and Profitability
Liquidity
Solvency / financial leverage
Profitability ratios
Measure the extent to which a company is effective in creating value.
- Some ratios focus on how efficiently a firm uses its assets to generate revenues.
- Other ratios focus on the firm’s ability to sell products at a high margin.
- Some combine both aspects of performance.
Profitability ratios
- Asset turnover
- Profit margin
- Return on assets (ROA)
- Return on equity (ROE)
- Earnings per share (EPS)
- (Price-earnings ratio)
- (Payout ratio)
Turnover ratios
Turnover ratios divide an Income Statement amount by a Statement of Financial Position amount.
- Most turnover ratios measure how effectively assets are used to generate revenues
- Turnover ratios can be calculated for specific categories of assets of for total assets.
Liquidity ratios
Liquidity refers to a firm’s ability to meet current obligations
Focus on firm’s working capital and cash management
Common measures of liquidity:
* Current ratio
* Acid-test ratio
* Accounts receivable liquidity indicators
* Inventory liquidity indicators
Working capital
Working capital is the excess of a firm’s current assets over its current liabilities
Watch out for these when analyzing sustainable income:
Unusual items (e.g. lawsuits, natural disaster losses)
Other Comprehensive Income (OCI) (e.g. unrealized gains/losses)
Discontinued operations (parts of the business that were sold or shut down)
Mergers and acquisitions
Changes in accounting methods (can distort trends)
Solvency ratios
- Solvency refers to a firm’s ability to pay its liabilities
- Solvency ratios focus on the use of debt
- Use of debt leverages return on equity
- Leverage also increases risk
- Creditors can force a firm into bankruptcy if it does not pay its interest.
Sustainable income
t’s the part of a company’s income that comes from normal, everyday business — not from weird or one-time events.
