Week 5 Financial Statement Analysis Flashcards
(27 cards)
Horizontal analysis
Study of percent change year to year. Completed for each line item in financial statement
Computing percent change
Horizontal analysis
Change in account = current year- prior year
Percent change in account = change in account / Prior year balance
Vertical analysis
Relationship of financial statement item to its base. All items shown as % of total.
Income statement base: total revenue
Balance statement base: total assets
Benchmarking
Compares a company to some standard set by others. Allows comparison of companies form same industry of different size
5 Categories of computing standard financial ratios
- Ability to pay current liabilities
- Ability to sell inventory and collect receivables
- Ability to pay debts
- Measuring profitability
- Analyzing stock investments
Ratios that measure ability to pay current liabilities
- Working capital
- Current Ratio
- Acid test (quick ratio)
Working capital
RATIO
=Current assets- current liabilities
-ability to pay current liabilities with current assets
Current ratio
RATIO
=Current assets/current liabilities
- Generally, 1.5 considered good
- ability to pay current liabilities with current assets
Acid test (quick ratio)
RATIO
=(Cash + ST investments + net current receivables)/Current liabilities
- Generally 0.9 - 1 acceptable
- Similar to current ratio with narrower base to measure liquidity
- EXCLUDES inventory and prepaid expense
Ratios that measure ability to sell inventory and collect receivables
- Inventory turnover
- Accounts receivable turnover
- Days sales in receivables
Inventory turnover
RATIO
=Cost of goods sold/Average inventory for a period
- Number of times company sells its average level of inventory per year
- Strive for profitable turnover
- Cost of goods sold and inventory used because they are reported at cost
Days inventory outstanding
365/inventory turnover
-Days it takes to sell average current inventory levels
Accounts receivable turnover
RATIO
=net sales/ average net accounts receivable
- Measures ability to collect cash from customers
- ratio of 12 indicates AR balance collected once a month
- high is good but too high may indicate credit is too tight
Days Sales in Receivables
RATIO
one day sales = net sales/365
days sales in receivables= average net accounts receivable/ one day sales
- Number of days sales in accounts receivable
- Lower indicates higher cashflow (compare to industry average)
Ratios used to measure ability to pay debts
- Debt ratio
2. Times interest earned
Debt ratio
RATIO
=Total assets/total liabilities
- Tells portion of assets financed with debt
- 0.62 is average (professor likes 0.5)
Times interest earned
RATIO
=Income from operations/ interest expense
-Shows number of times company could cover interest expense with operating income in a given period
Income from operations
Income earned from core of business without looking at other areas of business that may incur income/expense
Ratios used to measure profitability
- Rate of return on sales
- Rate of return on total assets (ROA)
- Return on common stockholders equity (ROE)
- Earnings per share
Rate of return on sales
RATIO
=net income/net sales
-Shows percent sales dollar is earned as net income
Rate of return on total assets
RATIO
=(net income + interest expense)/average total assets
- Company’s success at turning assets into profit
- Used by investors to see what they would get out of investing
Return on common stockholder’s equity
RATIO
=(net income - preferred dividends)/average common stockholder’s equity
- How much is earned for every dollar invested
- Relationship between net income and stockholder’s investment in company
Earnings per share
RATIO
=(net income - preferred dividends)/average # of shares outstanding
- Key measure of company’s success
- Income earned for each share of common stock
Ratios analyzing stock investments
- price earnings ratio (P/E)
- Dividends yield
- Book value per share common stock
