Week 1 Flashcards
(23 cards)
What can financial statement analysis be used for?
- Asses an M&A project
- make an investment recommendation
- determine the credit rating for a company
Where can information to make decisions about a business come from?
- balance sheet, income statement, cash flow statement, economic stats, industry reports
What are the 3 tools for financial statement analysis?
- Horizontal/ Trend analysis
- Vertical/ cross sectional analysis
- Ratio analysis
What is Horizontal/ trend analysis
Looks at changes of the same item. E.g. change in cash from year 3 to 4.
Calculation = 16-19/19=15= -15.8%
What is vertical/ cross sectional analysis
Helps to understand the composition of assets and revenue to highlight changes of compositions over time of a company.
- it must include at least 2 periods/companies to see changes in compositions
Example of TTM
On 15th July 2021 an analyst is examining a company with a fiscal year end on the 15th December. Earnings for 6 months ended 30 June 2021=$750, earnings for 6 months ended 30th June 2020= $550, Earnings for year ended 31 Dec 2020= $1200. Use the data above to calculate the companies trailing 12 months earning for 30th June 2021
TTM= 750+ (1200-550) =1,400
What is the total asset ratio
Revenue (NET SALES) / total asset
What is the Fixed asset ratio
Revenue/ fixed assets
What is the working capital turnover ratio
Revenue / working capital
How do we calculate working capital
Current assets - current liabilities
What is the formula for receivables turnover
Revenue/ receivables
What is the inventory turnover
Cost of sales/ inventory
What is the days of receivable outstanding ratio
Sales/ Average accounts receivable (of 2 years)
What is the payable turnover ratio
Purchases + cost pf goods sold / average of accounts payable.
then we take 365/ ratio answer
How can we work out the pruchases if it’s not available
Cost of sales + closing inventory - opening inventory
Why are averages used in fsa ratio calculations
because they provide a more accurate and representative view of a company’s financial performance over a period of time.
What does it mean to prepare a common size balance sheet
Percentages against the total e.g percentage of inventory in current asset/ totally asset
Why is the asset turnover ratio involve averaging in the data used for computing the ratio, why and how
It’s averaged since sales come from the income statement while total assets come from the balance sheet (2 different statements, therefore different uses. Because balance sheet is a snapshot figures can be historical therefore we average the balance sheet item including both a current year and previous year and divide by 2)
What is the formula for the cash conversion cycle
CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO)
what is the formula for days inventory held ratio
Cost of goods sold/ average of inventory
then take 365/ ratio computed above
what is the formula for interest coverage ratio
Net income + income tax + interest expense / interest expense
OR
ebit/interest expense
what is the long term debt to equity ratio
long term debt / (long term debt+ equity
when you are doing common size vertical income statements what do we put each item against (i.e. as the denominator
Item/ total revenue
e.g. cost of sales/ total revenue
net profit/total revenue
