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18 Cards in this Set
- Front
- Back
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Sources of Risk
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International
-Government regulations and attitudes -Political unrest -Exchange rate changes Domestic -Recession, Inflation, Interest rate changes Industry -Competition -Regulation -Raw Materials -Labor -Lawsuits |
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Focus of Risks
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Focus on how risk will impact the financial statements
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Financial Distress
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Failing to make interest payments
Defaulting on principle payments Filing for bankruptcy Liquidation |
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Short Term Liquidity Risk
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Firm ability to generate cash to service working capital needs and debt service requirements
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Long Term Solvency risk
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Longer term ability to generate cash internally of external source to satisfy plant capacity and debt repayment needs
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Credit Risk
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A firms ability to make interest and principle payments on borrowing when they become due
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Bankruptcy Risk
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Likelihood a firm will file for bankruptcy and then perhaps subsequently liquidate
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Market Equity beta risk
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Measure of the risk/return relationship by measuring the convariability of a firms returns with the returns of all securities in the market
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Market equity risk
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Attempts to explain differences in market rate of returns on common stock
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Financial Reporting Manipulation
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Risk of financial statement falsification by management
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Current Ratio
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=Current Assets/Current Liabilities
-Make sure its CURRENT -To assess companies ability to meet their day to day payments -Should be at least about 1 but not higher than 2-2 can signal they are not using their assets well enough |
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Quick Ratio
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-Current Assets-inventories/Current Liabilities
-More reasonable indicator of a company's ability to meet its short term financial obligations |
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Operating cash flow to current liabilities ratio
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Measure how well current liabilities are covered by the cash flow generated by a company's operations
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Working capital activity ratios
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Sales/Average Accounts receivable
-Expressed in a number of days by 365 -High ratio means-Works on a cash basis or its efficient -Low-Should reasses its credit policy |
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Inventory Turnover
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COGS/Average Inventory
-Should compare against industry standards |
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AP Tunover Ratio
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Purchases/Average accounts payable
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Debt Ratio
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Indicates what proportion of debt a company has relative to assets
-Greater than 1-More debt than its assets -Less than 1-More assets than debt |
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Interest Coverage Ratio
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Based on cash flows-Determines how easy a company can pay interest on outstanding debt
-The higher the better-Below 1.5 is bad |
