Cfa Level 1 - Financial Accounting Ratios

Front 1

Vertical Common-Size Income Statement Ratios

Back 1

Vertical Common-Size Income Statement Ratios = Income Statement Account÷Sales

Hint 1

You divide the income statement item by the same number as you do to get: Gross Profit Margin, net profit margin etc.

Front 2

Vertical Common-Size Balance Sheet Ratios

Back 2

Vertical Common-Size Balance Sheet Ratios =

Balance Sheet Account ÷ Total Assets

Front 3

[Define] Activity Ratios

Back 3

Measures efficiency of day-to-day tasks/ operations.

• Note, these are mixed ratios so we need to use theaverage of the balance sheet account (denominator).
  

Front 4

[Define] Liquidity Ratios

Back 4

Measures ability to pay short-term liabilities.

• Note, these are pure Balance Sheet ratios so no need to use theaverage of the balance sheet account (denominator).

Front 5

[Define] Solvency Ratios

Back 5

Measures ability to pay long-term liabilities.

• Note, solvency ratios pure balance sheet ratios but coverage ratios are mixed ratios.

Front 6

[Define] Profitability Ratios

Back 6

Provide information on how well the company generates operating profits and net profits from its sales/ asset base.

• Note, both mixed and pure ratios.
  

Front 7

[Define] Valuation Ratios

Back 7

Quantity of assets of flow of assets associated with an ownership claim.

Examples: Sales per share, earning per share etc.

Front 8

Activity Ratios

1. Inventory Turnover
   
2. Days of Inventory on Hand (DOH)
   

Back 8

1. Inventory turnover = COGS ÷ Avg. Inventory
   
2. Days of Inventory on Hand (DOH) = 365 ÷ Inventory Turnover
   

Front 9

Activity Ratios

1. Receivables Turnover
2. Days of Sales Outstanding (DSO)

Back 9

1. Receivables turnover = Revenue÷ Avg. receivables
2. Days of sales outstanding (DSO) = 365 ÷ Receivable Turnover

Front 10

Activity Ratios

1. Payables Turnover
   
2. Number of days of payables
   

Back 10

1. Payable turnover = Purchases ÷ Avg. trade payables
   
2. Number of days of payables = 365 ÷ Payable Turnover

Note: Purchases = ending inventory - beginning inventory + COGS

Front 11

Activity Ratios

Working Capital Turnover

Back 11

Working capital turnover = Revenue ÷ Avg. working capital

• Working Capital = Current Assets - Current Liabilities
  

Hint 11

Measures how effectively a company is using its working capital (A measure of asset utilization)

Front 12

Activity Ratios

1. Fixed Asset Turnover
   
2. Total Asset Turnover
   

Back 12

1. Fixed Asset Turnover = Revenue÷ Avg. net fixed assets (net of accumulated depreciation)
   
2. Total Asset Turnover = Revenue÷ Avg. total asset
   

Front 13

Liquidity Ratios

1. Current Ratio
   
2. Quick Ratio
   
3. Cash Ratio
   

Back 13

1. Current Ratio= Current Assets ÷ Current Liabilities
   
2. Quick Ratio =(Cash + Receivable + Short term marketable securities) ÷ Current Liabilities
3. Cash Ratio = (Cash +Short term marketable securities) ÷ Current Liabilities

Hint 13

1. If the Current ration > 1, paying of liabilities with current assets will increase the current ratio.

Front 14

Liquidity Ratios

Defensive Interval Ratio

Back 14

Defensive Interval Ratio = (Cash+receivables+short-term marketable securities) ÷ Daily cash expenditure

**Measures the number of days of avg. cash expenditure the firm could pay with its current liquid assets.

Front 15

Liquidity Ratios

Cash Conversion Cycle

Back 15

Cash conversion cycle=

(Days of sales outstanding) + (days of inventory on hand) - (number of days of payables)

**The length of time it takes to turn the firm's cash investment in inventory back into cash.

Front 16

Solvency (graphical representation)

Back 16

Front 17

Solvency Ratios

1. Debt-to-Asset Ratio
   
2. Debt-to-Capital Ratio
   

Back 17

1. Debt-to-asset ratio=Total Debt÷Total Assets
   
2. Debt-to-capital ratio =Total Debt ÷ (Total debt+Total shareholder's equity)

**Total debt = Long-term debt+interest bearing short-term debt

*Capital= All short-term and long-term debt plus preferred stock & equity

Front 18

Solvency Ratios

1. Debt-to-Equity Ratio
2. Financial Leverage Ratio (aka financial leverage multiplier or asset-to-equity ratio)
   

Back 18

1. Debt-to-Equity ratio= Total Debt ÷ Total shareholder's equity
   
2. Financial Leverage Ratio*=Avg. total assets ÷ avg. total equity

*Uses avg. (even though it's a pure BS ration b/c it's part of the DuPont analysis)

**Total debt = Long-term debt+interest bearing short-term debt

Hint 18

The higher the leverage ratio is the more levered a company is (i.e. the higher the assets are in relation to its equity, the more leverage in its capital structure)

Front 19

Solvency Ratios

1. Interest Coverage
2. Fixed charge coverage

Back 19

1. Interest Coverage=EBIT÷Interest Payments
   
2. Fixed charge coverage = (EBIT+Lease Payments) ÷ (Interest payments + lease payments)
   

**EBIT= Earning before interest and tax (proxy for operating income)

Front 20

Profitability Ratios

1. Gross Profit Margin
   
2. Operating Profit Margin

Back 20

1. Gross Profit Margin= Gross Profit ÷ Revenue (sales)
   
2. Operating Profit Margin= Operating Income* ÷ Revenue (sales)

*Operating Income = EBIT (proxy).

Gross profit = net sales- COGS

Net Income= earning after tax but before dividend

Front 21

Profitability Ratios

1. Pretax Margin
2. Net Profit Margin

Back 21

1. Pretax Margin= EBT* ÷ Revenue (sales)
   
2. Net Profit Margin = Net Income ÷ Revenue (sales)

*EBT=Earning before tax but after interest

Front 22

Profitability Ratios

1. Return on Assets (ROA)**
   
2. Operating ROA
   

**Regular and modified

Back 22

1. Return on Assets (ROA)** = Net Income ÷ Avg. Total Assets
2. Modified ROA = Net income + interest exp x(1-tax rate) ÷ Avg. Total Assets
3. Operating ROA= Operating Income ÷ Avg. Total Assets

** use the regular ROA equation if not specified otherwise

Front 23

Profitability Ratios

1. Return on Total Capital (ROTC)
   
2. Return on Equity (ROE)
   
3. Return on common equity
   

Back 23

1. Return on Total Capital = EBIT÷ Avg. (Short+long-term debt + equity)
   
2. Return on Equity (ROE) = Net income ÷ Avg. total equity
   
3. Return on common equity = (Net Income - pref. div.) ÷ Avg. common equity
   

Front 24

DuPont System:

Original Equation (3-stage)

Back 24

Breaks ROE down to Net Profit Margin, Asset turnover & Leverage ratio. If ROE is low at least one of the following is true, the company:

1. has poor profit margin

2. has poor asset turnover

3. too little leverage

Front 25

DuPont System: Extended Equation (5-stage)

Back 25

Breaks down ROE further by breaking down net profit margin to (1-3). ROE becomes: (1) EBIT Margin, (2) Interest Burden, (3) Tax burden, (4) Asset turnover, (5) Leverage.

Front 26

Valuation Ratios (per share)

1. P/E (Price to Earnings)
2. P/CF (Price to Cash Flow)
3. P/S (Price to Sale)
4. P/BV (Price to book value)
   

Back 26

1. P/E = Price per share ÷ Earning per share
2. P/CF = Price per share ÷ cash flow per share
   
3. P/S= Price per share÷ sale per share
   
4. P/BV = Price per share÷book value per share
   

Hint 26

2. P/CF - a low ratio indicates an undervalued stock (i.e. a blue stock)

4. P/BV - a higher ratio indicates higher growth (i.e. a growth stock)

Front 27

Per-share quantities

1. Basic EPS
   
2. Diluted EPS
   
3. Cash flow per share
   

Back 27

1. Basic EPS = (Net income - pref. div.) ÷ Wgtd. avg. # of ordinary shares
   
2. Diluted EPS = Income adjusted for dilutive securities ÷ Wgtd. avg. # shares adjused for dilution
   
3. Cash flow per share = CFO ÷Wgtd. avg. # shares

Front 28

Per-share quantities

1. EBITDA per share
   
2. Dividends per share

Back 28

1. EBITDA per share = EBITDA ÷ Avg. # of ordinary shares
   
2. Dividends per share = Common dividends ÷ Wgtd. avg. # common shares
   

Front 29

Dividend related quantities

1. Dividends payout ratio
   
2. Retention rate (b)
   
3. Sustainable growth rate (g)
   

Back 29

1. Dividends payout ratio = Common dividends ÷ (Net Income - pref. div)
   
2. Retention rate (b) = (Earnings avail. to common shares common div.) ÷ Earning available to common share holders. [ i.e. 1 - div. payout ration]
   
3. Sustainable growth rate (g) = b x ROE
   

Hint 29

1. A high dividend payout ratio indicates a more mature, slow growing company.

Front 30

Business Risk Ratios

1. Coefficient of var. of operating income
   
2. Coefficient of var. of net income
3. Coefficient of var. of revenue

Back 30

1. CV of operating income = Std. dev EBIT÷ mean EBIT
   
2. CV of net income = std. dev Net Income ÷ Mean Net Income
   
3. CV of revenue = std. dev. revenue ÷ Mean revenue
   

Front 31

Segments Ratios

1. Segment Margin
   
2. Segment asset turnover
   
3. segment ROA
   
4. Segment debt ratio (IFRS only)
   

Back 31

1. Segment margin = Segment EBIT ÷ Segment revenue
   
2. Segment asset turnover = Segment revenue ÷ segment assets
3. Segment ROA = Segment EBIT ÷ Segment Assets
4. Segment debt ratio= segment liabilities ÷ segment assets
   

**EBIT = proxy for profit above

Front 32

LONG LIVED ASSETS

1. Average age
   
2. Total Useful life
3. Remaining useful life

Back 32

1. Average age = Accumulated depreciation ÷ Annual Depreciation Exp.
2. Total Useful life = Historical cost ÷ Annual depreciation exp.
3. Remaining useful life = Ending net PP&E* ÷ Annual Depreciation exp.

*PP&E net of acc. depr.

Front 33

More long lived asset:

1. % asset base renewed

Back 33

1. % asset base renewed = Capex ÷ (Capex + gross PP&E)