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49 Cards in this Set
- Front
- Back
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Net operating profit margin (NOPM) =
What does it mean? Median NOPM for public companies? |
NOPAT/Revenue
for each dollar in sales, the amount earned in profit after operating expenses and tax Median NOPM is .06 |
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Net operating asset turnover (NOAT) =
What does it mean? Median NOAT for public companies? |
Revenue/ Average NOA
For each each dollar in NOA, the company realizes an the amount in sales Median NOAT is 1.4 |
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What are the limitations of ratio analysis?
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1. GAAP Limitations
- Measurability - Non capitalized Costs -Historical Costs 2. Company Changes 3. Conglomerate Effects 4. Fuzzy View |
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ROE =
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Net Income/ Average Stockholders Equity
or Operating Return + Non-operating Return |
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Net operating profit after tax (NOPAT) =
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NOPAT = Net operating profit before tax (NOPBT) - tax on operating profit
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Tax on operating profit =
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= Tax expense + (pretax net non-operating expense*tax rate)
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Financial Leverage Ratio =
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= average assets/average equity
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What items on the income statement are non-operating?
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- Interest Expense
- Interest and dividend revenue - Investment gains and losses |
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What items on the balance sheet are non-operating?
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- Cash and CE
- Short term investments - Current Assets of discontinued operations - longterm investments of securities - longterm assets in discontinued operations - short term notes in interest payable - current maturities of longterm debt - bond notes payable - capitalized lease obligations - long term liabilities of discontinued operations - all equity accounts |
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Net Operating Assets =
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Operating Assets - Operating Liabilities
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Return on Net Operating Assets (RNOA) =
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NOPAT/Average NOA
or NOPAT/Sales * Sales/Average NOA |
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Operating Assets Typically Include:
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Cash
Receiveables Prepaid expenses Porperty, Plant, Equitpment Capitalized Lease Assets |
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The utility industry typically has a _______ NOPM and a ______ NOAT
The Retail industry typically has a _______ NOPM and a ______ NOAT The Restaurant industry typically has a _______ NOPM and a ______ NOAT The Wholesale non-durable industry typically has a _______ NOPM and a ______ NOAT The communication industry typically has a _______ NOPM and a ______ NOAT The hotel industry typically has a _______ NOPM and a ______ NOAT |
Utility: High NOPM, Low NOAT
Retail: Low NOPM, Medium High NOAT Restaurant: Medium NOPM, Medium NOAT Wholesale Non-durable: Low NOPM, High NOAT |
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Industries with High Debt to Equity ratios include:
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In order:
Utilities Wholesale - nondurables Hotels Retail - Foods Communication Manufacturing - printing Wholesale - Durables |
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Disaggregate ROE
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Profit Margin*Asset Turnover*Financial Leverage
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Disaggregate Return on Assets. How is ROA used?
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Profit Margin*Asset Turnover
Used to compare two firms where one is solely equity financed, and one that is financed with a mix of debt and equity. Using this ratio instead of ROE is more suitable for this situation. |
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Formula for ROA adjusted?
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Net income + (interest expense (1-tax rate) / Average total assets
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What is evergreen debt?
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When a company consistently pays off debt by taking on more debt.
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What are the sources of credit?
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Non-bank financing
Bank Loans Trade Credit Publicly Traded Debt Lease Financing |
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What is the purpose Credit Risk Analysis?
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To quantify potential credit losses so lending decisions are made with full information.
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Expected credit loss =
Explain |
Expected credit loss = chance of default*Loss given default
Chance of default = primarily debtors ability to pay down the debt. Loss given default = If defaulted how big will loss be? |
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Times interest earned =
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TIE = Earnings before interest and taxes/Interest expense
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What is indicated by the Times Interest Earned Ratio?
What does it assume? |
Reflects the operating income available to pay interest expense
Assumes only interest must be paid because the principal will be refinanced. |
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What is EBITDA?
What does it measure? How does it compare to Times Interest Earned ratio? |
EBITDA = Earning before tax + interest expense (net) + depreciation + amortization.
EBITDA is always higher than times interest earned. Measures ability to pay interest out of current profits |
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What ratio measures a company's ability to generate additional cash to cover debt payments as they come due?
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Cash from operations to total debt ratio
= cash from operations/(short term debt + long term debt) |
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Explain the free operating cash flow to total debt analysis.
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Considers excess operating cash flow after cash is spent on capital expenditures.
Free operating cash flow to total debt = Cash from operations - Capex / (short term debt + long term debt) |
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Quick ratio =
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Cash + Marketable Securities + Accounts Receivable / Current Liabilities
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Define Solvency
What are the most commonly used ratios for solvency analysis? |
Solvency - a company's ability to meet it's debt obligations
Liabilities to Equity and Debt to Equity |
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What does the liabilities to equity ratio indicate?
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Conveys how reliant and company is on creditor financing compared with equity financing.
Does not distinguish between current and longterm debt. |
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What does the debt to equity ratio assume about current operating liabilities?
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That they will be repaid from current assets (self-liquidating)
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A default includes:
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failure to make payments and violation of loan covenants
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What credit terms are built into loans in advanced to minimizing potential loss?
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Credit limits
Collateral Repayment Terms Convenants |
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What is the best collateral?
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High grade property such as securities with an active market. Value is known and liquidation is straight forward.
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What are the 3 common types of debt covenants?
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1. Covenants requiring borrower to submit financial statements to lender
2. Covenants restricting actions like mergers 3. Covenants that require borrower to maintain specific financial conditions including ratios and minimum equity. |
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How does a high credit rating affect:
Interest expene to EBITA EBITA margin Operating Margin Debt to capitalized assets |
Interest expense to EBITA - lower interest expense
EBITA margin - higher Operating Margin - higher Debt to capitalized assets - lower |
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What is the Altman model used for?
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Used to predict bankruptcy risk
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In the Altman model, what does a high score indicate?
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Higher the score, the lower the bankruptcy risk.
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What do high retained earnings indicate concerning profitability?
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High retained earnings indicate a history of longterm profitability.
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The Altman model can predict accuracy to __% in the first year and __% in the second year.
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The Altman model can predict accuracy to 95% in the first year and 72% in the second year.
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Define Type 1 error
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Type 1 - false negative. Company is healthy but Z score predicts bankruptcy
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Define Type 2 error
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Type 2 - false positive. Company is projected to go bankrupt but remains intact
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What factors do ratings agencies use to determine credit ratings?
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S&P: Busiiness Risk, Industry Characteristics, Competitive position, management, financial risk, characteristics, flexibility policy, profitability, capital structure, cash flow protection
Moodys: Factor 1: Size, Scale and Diversification Factor 2: Product Portfolio and Profitability Factor 3: Financial Strength Factor 4: Financial Policies |
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What are porters 5 forces?
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1. Threat of entry
2. Threat of substitution 3. Bargaining power of suppliers 4. Bargaining power of buyers 5. Industry competition/rivalry |
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Liabilities are listed in order of ______?
Assets are listed in order of _____? |
Liabilities: Maturity
Assets: Liquidity |
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What are the requirements for assets listed on a balance sheet?
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Assets must be:
1. Owned or controlled by the company 2. Possess expected future economic benefits |
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Which assets are used up or converted into cash over more than one year?
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Longterm assets are used up or converted into cash over more than one year.
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What events must a form 8K be filed for within 4 days after the event?
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- Entry into or termination of a material definitive agreement (bankruptcy)
- Exit from a line of business or impairment of assets - Change in the company's cpa firm - Change in the control of the company - Departure of the company's executive officers - Changes in the company's articles of incorporation or bylaws. |
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Why do outsiders use Form 8K?
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To monitor for material adverse changes in the company.
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Dissaggregated, RNOA =
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= NOPM * NOAT
= NOPAT/Sales * Sales/NOA |
