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Flashcards in Stream II - Lecture 3 Deck (17):

What is the goal of financial analysis?

1) To assess the performance of a firm in the context of its stated objectives and strategy

2) To understand what has happened and what will happen to the business


What 2 types of strategy is firm growth and profitability affected by?

1) The product market strategy (operating and investment management)

2) Financial market strategy (financing decisions and dividend policy)


How do we calculate ROE?

Net income/Shareholders' Equity

You will be told in the exam which approximation of equity to use.


Why is ROA via the Traditional approach said to be an incoherent ratio?

The numerator of ROA - net income - only represents the income to shareholders while the numerator - total assets - includes debt as well


How do we solve the incoherence of ROA?

We use operating ROA.

Op. ROA = NOPAT/Net Op. Assets


What is NOPAT and how do we calculate it?

Net operating profit after tax = Net profit + Net interest expense after tax


How do we calculate Net Operating Assets?

Operating non-current assets - Non-interest-bearing non-current liabilities

You may have to use the average of this over the year


Why is Op. ROA more coherent than ROA?

Both the numerator and profit are asset side


What is the benchmark for ROA?



What happens to the ROA when we increase leverage?

It increases if Op. ROA > rd (positive spread. It decreases if Op. ROA < rd (negative spread). It stays the same if Op. ROAD = rd (zero spread).


What is Net Profit Margin and how do you calculate it?

A measure of the profitability of the firm's operating activities.

NPM = Net Income/Sales


What is Gross Profit Margin?

GPM = (Net income - COGS)/Sales


What is EBITDA Margin and why is useful?

EBITDA MARGIN = EBITDA/Sales. Very good for removing manager influences on financial information as all the accruals are removed.


What is Asset Turnover (ATO) and how do you calculate it?

ATO indicates how many sales dollars the firm is able to generate for each dollar of its assets. It is an indicator of asset productivity.

ATO = Sales/Total Assets

You may have to use a weighted average for this.


How do you calculate Trade Receivables Days?

Trade Receivables/Average sales per day


How do you calculate leverage?

Leverage = Total Assets/Shareholders' Equity

Financial leverage allows a firm to have an asset base larger than its equity.


What is solvency?

The ability of a firm to pay back long-term debtholders