Analytical Methods (Analyzing Accounting)

Front 1

Types of Financial Statement Analysis (5)

Back 1

1) Liquidity
2) Solvency
3) Managerial Efficiency
4) Profitability
5) Market Value of a Firm

Front 2

Liquidity Ratios (use + 1)

Back 2

- How quickly a firm can convert its assets to cash to satisfy its obligations.
Examines: 1) Cash Flow Statement, 2) Balance sheet.
1) Current Ratio

Front 3

Current Ratio (Def + Use)

Back 3

- Type of Liquidity Ration
- Measures what portion of assets can be used to pay obligations coming due within a year.

Front 4

Current Ratio (equation)

Back 4

Current Assets/ Short-term Liabilities

Front 5

Current Ratio (Target)

Back 5

Book: should always be greater than 15
Shep: Analysts hope for >2

Front 6

Solvency Ratios (Use + 3 Types)

Back 6

- This is used to measure the relationship between assets and liabilities, But not necessarily in the short term like liquidity does.
1) Debt/equity
2) Leverage Ratio
3) Interest Coverage Ratio

Front 7

Debt/Equity Ratio (def + Equation)

Back 7

- Type of Solvency Ratio
Total Liabilities/Total Equity

Front 8

Debt/Equity Ratio (Target)

Back 8

Heavily industry dependent

Front 9

Leverage Ratio (Def +equation)

Back 9

- Type of Solvency Ratio
- Total liabilities/Total assets

Front 10

Leverage Ratio (Target)

Back 10

Depends on the industry, but typically look at changes over time.

Front 11

Interest Coverage Ratio (Def + Use)

Back 11

- Type of Solvency Ratio
- Measures a firms ability to make their interest expense payments.
- Based on INCOME STATEMENT

Front 12

Interest Coverage Ratio (Equation)

Back 12

EBIT(operating earnings)/Annual Interest Expense

Front 13

Interest Coverage Ratio (target)

Back 13

- Varies by industry.
- Look for very high numbers to be good (a 2 would mean half of earnings are going toward interest.
- The larger the ratio the more likely it will be able to pay its future interest obligations as they come due

Front 14

Managerial Efficiency Ratios (Use)

Back 14

Used to evaluate performance of employees, and can be used to calculate compensation packages.

Front 15

Managerial Efficiency Ratios (Types (3))

Back 15

1) Receivables to Sales Ratio
2) Turnover Ratio
3) Interest Costs

Front 16

Receivables to Sales Ratio (Measures + Def)

Back 16

- Type of managerial efficiency ratio
- Measures what % of sales are being purchased on credit.

Front 17

Receivables to Sales Ratio (Equation)

Back 17

A/R /Sales (gross) Revenue

Front 18

Receivables to Sales Ratio (Target)

Back 18

Anything more than 15% is an issue , especially if it is rising.

Front 19

Turnover Ratio (Def + Measures)

Back 19

- Type of Managerial Efficiency Ratio
- Measures how many times a firm's inventory turns over in a year. equals how many times the inventory turned over each year.

Front 20

Turnover Ratio (target)

Back 20

Varies by industry.
Grocery stores would be high Louis Vutton would be low

Front 21

Turnover Ratio (Equation)

Back 21

Cogs/Inventory

Front 22

Interest costs Ratio (def + measures)

Back 22

- Type of Managerial Efficiency Ratio
- Measures the firms total interest rate for all notes payable
- this is important because it can be a measure of the riskiness of a venture since firms charge higher interest rates to higher risk ventures

Front 23

Interest Cost Ratio (Equation)

Back 23

Interest Payments/Interest Bearing Debt
- Where Interest bearing debt = liabilities bearing interest

Front 24

Interest Cost Ratio (Target)

Back 24

Higher is worse

Front 25

Profitability Ratios (3)

Back 25

1) Margin
2) Return on Assets (ROA)
3) Return on Equity (ROE)

Front 26

Margin (Def + Measures)

Back 26

- Type of profitability ratio
- Measures the percentage of sales that after direct costs (COGS) and indirect costs (Operating expenses) are deducted, so .125 means that every dollar of sales generated 12.5 cents of income

Front 27

Margin (equation)

Back 27

Operating expenses (EBIT)/Sales (gross) revenue

Front 28

Margin (target)

Back 28

Varies.
Look for changes within a firm

Front 29

Return on Assets (Def + Measures)

Back 29

Type of profitability Ratio
- Measures the amount of income gneerated by each dollar of assets

Front 30

Return on Assets (Equation)

Back 30

Net income/Total assets

Front 31

Return on Assets (target)

Back 31

Sometimes there is a target in loan covenants

Front 32

Return on Equity (def + measures)

Back 32

Type of profitability ratio
- Measures the return on the owner's investment in a firm

Front 33

Return on Equity (ROE) (Equation)

Back 33

Net income/Total Owner's Equity

Front 34

Market Value of a Firm Ratios (types 4)

Back 34

1) Book value per share
2) Earnings per share
3) Price to earning ratio
4) Tobin's Q

Front 35

Book value per share (def + measure)

Back 35

Type of market value ratio
- may or may not be a good estimate of the true market value of a firm or its shares

Front 36

Earnings per share (def + measure)

Back 36

Type of market value ratio
- measures the amount of profit attributable to each share

Front 37

Price to earning ratio (PE) (def + measures)

Back 37

Type of market value ratio
- measures the expectations w/respect to reality, can be used to identify industry bubbles

Front 38

Tobin's Q (def + measure)

Back 38

Type of market value ratio
- Measures how much people value the firm compared to what is actually on the balance sheet.