Week 11 - Topic 11 - Financial statement analysis Flashcards
(20 cards)
Name the 3 factors used in financial analysis?
- Previous periods
- Competitors
- Industry averages
What are the 3 types of ratios when it comes to the main financial statements?
- Liquidity ratios → measures of the short-term ability of an entity to pay its maturing obligations and to meet unexpected cash needs.
- Solvency ratios→ measures of the ability of an entity to survive over a long period.
- Profitability ratios → measures of the profit or operating success of an entity for a given period.
Define ‘Current ratio’? How is it calculated?
expresses the relationship of current assets to current liabilities, calculated by dividing current assets by current liabilities.
Define ‘Quick ratio’? How is it calculated?
Is a measure of an entity’s immediate short-term liquidity. It is calculated by dividing the sum of cash, marketable securities and net receivables by current liabilities.
What is the ‘Current cash debt coverage’?
is the ratio of net cash provided by operating activities to average current liabilities.
What does the ‘Receivables turnover’ measure?
measures the average number of times that receivables are collected during the period.
What does the ‘Inventory turnover’ measure?
measures the average number of times that the inventory is sold during the period.
What is the ‘Average days in the inventory ratio’?
a ratio that measures the average number of days it will take to sell the inventory.
What does the ‘Debt to total assets ratio’ measure?
measures the percentage of total assets financed by creditors. It is calculated by dividing total liabilities by total assets.
What does the ‘Times interest earned (AKA interest coverage)’ indicate?
indicates the entity’s ability to meet interest payments as they come due.
Define ‘Return on ordinary shareolders’ equity (ROE) ratio’? How is it calculated?
a ratio that shows the amount of profit earned for each dollar invested by the shareholders. It is calculated by dividing the profit available to ordinary shareholders by the average ordinary shareholders’ equity.
What does the ‘Return on assets (ROA) ratio’ measure?
measures the overall profitability of assets in terms of the profit earned on each dollar invested in assets.
Define ‘Profit margin ratio’? How is it calculated?
a measure of the amount of each dollar of sales that results in profit. It is calculated by dividing profit by net sales for the period.
What does ‘Asset turnover’ measure? How is it calculated?
measures how efficiently an entity uses its assets to generate sales. It is determined by dividing net sales by average total assets for the period.
What does ‘Gross profit margin’ measure? How is it calculated?
is determined by dividing gross profit (net sales less cost of sales) by net sales. This rate indicates an entity’s ability to maintain an adequate selling price above its costs.
What does the ‘Operating expenses to sales ratio’ measure? How is it calculated?
measures the costs incurred to support each dollar of sales. It is calculated by dividing operating expenses (selling and administrative expenses) by net sales.
What does the ‘Earnings per share ratio’ measure? How is it calculated?
is a measure of the profit earned on each ordinary share. It is calculated by dividing profit available to ordinary shareholders by the weighted average number of ordinary shares issued.
What does the ‘Price/Earnings ratio (P/E ratio)’ measure?
measures the ratio of the market price of each ordinary share to the earnings per share.
What does the ‘Dividend payout rate’ measure? How is it calculated?
Measures the percentage of profit distributed in the form of dividends. It is calculated by dividing dividends paid on ordinary shares by profit.
What does ‘EBIT’ stand for?
Earnings before interest and taxes.
