Week9 Flashcards
(27 cards)
how do you define goodwill
how much extra the company is willing to pay if it buys another company If the company is not acquired, goodwill is 0
what does negative net working capital entail
other people are financing your inventory. the company is borrowing money to finance their inventory.
do companies that sell differentiated goods have a higher or lower operating efficiency = net profit margin?
higher
what is the definition of ebit/sales
ebit margin
define operating efficiency / net profit margin
net income / sales
what is the definition of asset management efficiency
sales/total assets. how effective are you at using your assets to generate sales
what is the definition of ROA
operating efficiency x asset management efficiency = net income / assets (how much net income you can get out of your assets)
how do you define financial leverage/equity multiplier
total assets/total equity
what is the benefits/disadvantages of increasing financial leverage
higher ROE, more likely to go into bankruptcy if you cant pay off debt obligations
what are profitability ratios
return on assets and return on equity and profit margin
what is du pont’s analysis
break down roe into 3 value drivers: operating efficiency, asset management efficiency, equity multiplier
what are the four types of financial ratios
profitability, liquidity, solvency, activity ratios
what are the liquidity ratios
current ratio and quick ratio
what are the solvency ratios
debt to assets ratio, interest coverage ratios
what are the activity ratios
inventory turnover, receivable turnover, asset turnover
difference in quick and current ratio
high current ratio and low quick ratio means high level of inventories
is liquidity more important for companies that sell differentiated or undifferentiated products ?
differentitaed, more difficult to sell these goods. Differentiated goods are for specific groups of
people. In order to sell, may have to decrease
price more than for undifferentiated good.
what are the two types of solvency ratios
debt-to-total assets, time interest earned
what is the difference between stocks and flows
the first refers to a single point in time while the latter refers to over a period in time. stock accounts reported on balance sheet, where flow accounts recorded on income statement
what cash flows are included in the initial investments
accounts receivable, inventory, plant and equipment, accounts payable, cash
what is included in the revenue
cash sales and credit sales
what is included in the ebit expense (the expenses before you get to EBIT)
COGS
what is included in the operating cash flows
ebit - taxes (tax rate * ebit) + depreciation -incremental capex - incremental working capital
what is a common size balance sheet
everything expressed as a percentage of assets
