Week 11 (financial statement analyse) Flashcards
(15 cards)
Financial statement analyse
Areas of analysis
- Liquity
- Solvency
- Profitablity
Liquidity
- short term ability for an entity to pay its maturing obligations and meet unexpected needs for cash. This looks at:
- current assets
- current liabilities
- Liqiud assets: assets that can be quickly converted into cash
4 Different types of ratios to look at:
- current ratio
- Quick ratio
- Recievables turnover
- inventory turnover
Current ratio
- AKA working capital ratio
= Current assets/current liabilities
The higher the ratio the better.
Quick ratio
Measures a companys ability to meets its short term obligations with its most liquid assets.
This therefore excludes inventories and prepayments
(current assets - inventory - prepayments)/current liabilities
Recievables turnover (average collection period)
Measures the liquity of recievables, the number of times that accounts are paid by customers in a period
- a higher number is better
= net credit sales/Average accounts recievable
To find the average collection period
= 365/recievables turn over
- this number is given in days
Inventory turnover (average days)
the number of times that iventory is sold in a period
= cost of sales/average inventory
- a higher number is better
= 365/inventory turnover
the shorter the period the better
Solvency
Measures the ability of an entity to survive over a long period of time
- debt ratio
- interest coverage ratio
Debt ratio
= total liabilities/ total assets
The higher this number is the worse
Intereset coverage ratio
= earnings before interest and tax/ interest expense
- the higher is better
Profability
Measures the profit or operating success of an entity for a period of time
- Return on equity ratio
- Return on asset ratio
- profit margin
- Gross profit margin ratio
- Asset turnover
Return on equity
Shows the amount of profit earned for each dollar invested by oridnary shareholders
= Profit available(to ordinary shareholders)/Average ordinary shareholder’s equity
a higher number is better
Return of assets
amount of profit earned as a proportion of total assets
- the higher the better
= profit after taxes/ average total assets
Profit margin
Measurs the amount of dollar sales that results in profit
- higher is normally better
= profit after taxes/Net sales
Gross profit margin
measures the amount of each dollar of sales that results in gross profit
= Gross profit/Net sales
Asset turnover
shows how efficiently assets are used to generate revenue
- higher is better
= net sales/average total assets
