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

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Vertical Common-Size Balance Sheet Ratios

Back 2

Vertical Common-Size Balance Sheet Ratios = Balance Sheet Account ÷ Total Assets

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[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).

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[Define] Liquidity Ratios

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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).

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[Define] Solvency Ratios

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Measures ability to pay long-term liabilities. Note, solvency ratios pure balance sheet ratios but coverage ratios are mixed ratios.

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[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.

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[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.

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Activity Ratios Inventory Turnover Days of Inventory on Hand (DOH)

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

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Activity Ratios Receivables Turnover Days of Sales Outstanding (DSO)

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

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Activity Ratios Payables Turnover Number of days of payables

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Payable turnover = Purchases ÷ Avg. trade payablesNumber of days of payables = 365 ÷ Payable Turnover Note: Purchases = ending inventory - beginning inventory + COGS

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Activity Ratios Working Capital Turnover

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Working capital turnover = Revenue ÷ Avg. working capital Working Capital = Current Assets - Current Liabilities

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Activity Ratios Fixed Asset Turnover Total Asset Turnover

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

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Liquidity Ratios Current RatioQuick Ratio Cash Ratio

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Current Ratio= Current Assets ÷ Current Liabilities Quick Ratio =(Cash + Receivable + Short term marketable securities) ÷ Current LiabilitiesCash Ratio = (Cash +Short term marketable securities) ÷ Current Liabilities

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Liquidity RatiosDefensive Interval Ratio

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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.

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Liquidity RatiosCash Conversion Cycle

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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.

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Solvency (graphical representation)

Back 16

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Solvency Ratios Debt-to-Asset RatioDebt-to-Capital Ratio

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Debt-to-asset ratio=Total Debt÷Total AssetsDebt-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 Debt-to-Equity RatioFinancial Leverage Ratio (aka financial leverage multiplier or asset-to-equity ratio)

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Debt-to-Equity ratio= Total Debt ÷ Total shareholder's equity 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

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Solvency Ratios Interest CoverageFixed charge coverage

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Interest Coverage=EBIT÷Interest Payments Fixed charge coverage = (EBIT+Lease Payments) ÷ (Interest payments + lease payments)**EBIT= Earning before interest and tax (proxy for operating income)

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Profitability Ratios Gross Profit Margin Operating Profit Margin

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Gross Profit Margin= Gross Profit ÷ Revenue (sales) Operating Profit Margin= Operating Income* ÷ Revenue (sales)*Operating Income = EBIT (proxy). Gross profit = net sales- COGS Net Income= earning after tax but before dividend

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Profitability Ratios Pretax MarginNet Profit Margin

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Pretax Margin= EBT* ÷ Revenue (sales) Net Profit Margin = Net Income ÷ Revenue (sales)*EBT=Earning before tax but after interest

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Profitability Ratios Return on Assets (ROA)**Operating ROA **Regular and modified

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Return on Assets (ROA)** = Net Income ÷ Avg. Total Assets Modified ROA = Net income + interest exp x(1-tax rate) ÷ Avg. Total Assets Operating ROA= Operating Income ÷ Avg. Total Assets ** use the regular ROA equation if not specified otherwise

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Profitability Ratios Return on Total Capital (ROTC)Return on Equity (ROE) Return on common equity

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

Front 24

DuPont System: Original Equation (3-stage)

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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 margin2. has poor asset turnover 3. too little leverage

Front 25

DuPont System: Extended Equation (5-stage)

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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) P/E (Price to Earnings) P/CF (Price to Cash Flow) P/S (Price to Sale) P/BV (Price to book value)

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P/E = Price per share ÷ Earning per shareP/CF = Price per share ÷ cash flow per share P/S= Price per share÷ sale per share P/BV = Price per share÷book value per share

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Per-share quantities Basic EPS Diluted EPS Cash flow per share

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

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Per-share quantities EBITDA per share Dividends per share

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

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Dividend related quantities Dividends payout ratio Retention rate (b) Sustainable growth rate (g)

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

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Business Risk Ratios Coefficient of var. of operating income Coefficient of var. of net income Coefficient of var. of revenue

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

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Segments Ratios Segment Margin Segment asset turnoversegment ROA Segment debt ratio (IFRS only)

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Segment margin = Segment EBIT ÷ Segment revenue Segment asset turnover = Segment revenue ÷ segment assets Segment ROA = Segment EBIT ÷ Segment Assets Segment debt ratio= segment liabilities ÷ segment assets **EBIT = proxy for profit above

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LONG LIVED ASSETS Average age Total Useful life Remaining useful life

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