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

1

## What is the goal of financial analysis?

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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

2

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

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

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

3

## How do we calculate ROE?

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Net income/Shareholders' Equity

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

4

## 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

5

## How do we solve the incoherence of ROA?

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We use operating ROA.

Op. ROA = NOPAT/Net Op. Assets

6

## What is NOPAT and how do we calculate it?

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

7

## How do we calculate Net Operating Assets?

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

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

8

## Why is Op. ROA more coherent than ROA?

### Both the numerator and profit are asset side

9

## What is the benchmark for ROA?

### WACC

10

## 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).

11

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

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

NPM = Net Income/Sales

12

## What is Gross Profit Margin?

### GPM = (Net income - COGS)/Sales

13

## 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.

14

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

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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.

15

## How do you calculate Trade Receivables Days?

### Trade Receivables/Average sales per day

16

## How do you calculate leverage?

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Leverage = Total Assets/Shareholders' Equity

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

17