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25 Cards in this Set
- Front
- Back
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Formula for Current Ratio
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Current Assets/Current Liabilities
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Interpret Current Ratio/Liquidity
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the ability of the firm to convert assets into cash. High liquidity is good typically, low mean that it may struggle paying back liabilities. The issue with an overly high ratio is that the company's liquid assets will not always generate significant returns
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Formula for Debt Ratio
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Total Liabilities/Total Assets
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Interpret Debt Ratio/Capital Structure
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Is the firm made up mostly of debt or assets and equity?
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Formula for Total Assets Turnover
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Sales/Total Assets
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Interpret Asset Management Efficiency Ratio
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Percent of sales in comparison to assets. Did the company use the assets to effectively create inflows of cash?
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Formula for Net Profit Margin
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Net Income/sales
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Interpret Net Profit Margin
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What percent of sales was the company able to retain after taxes and interest and other expenses?
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Formula for EPS
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Net Income/# shares outstanding
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Interpret EPS
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How much income/earnings was generate per share?
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Formula for P/E
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Price per share/EPS
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Interpret P/E and Market Valuation
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Is the share priced reasonably on the market? Is it generating enough earnings per share?
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Interpret Average Collection Period
A/R / (sales/365) |
[A/R / (SALES/365)]
Tells management how quickly cash can be generated from sales in the accounts receivable account |
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Interpret Acid Test
(Cash +short term securities+net A/R) /Current Liabilities (Current Assets-inventory)/Current Liabilities |
How liquid is the firm WITHOUT recognizing the amount of inventory available?
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Interpret A/P Deferral
(A/P)/ (COGS/365) |
How long does it take the company to pay off accounts payable?
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Interpret Inventory Conversion Period
Inv/(cogs/365) |
how quickly can inventory be paid off and converted into sales revenue?
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Interpret Times Interest Earned
EBIT/Interest Expense |
How many times was the interest expense earned?
Tells company how many times the payment could have been made before running out of funds |
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Interpret OROA
EBIT/TOTAL ASSETS |
operating return on assets
how much money did the company receive in relation to the total assets of the firm? |
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Market-To-Book
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(Market price/share) / (book value/share)
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Common Size Financial Statements
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Common Size Income Statement:
Take each entry and divide by the total revenues Common Size Balance Sheet: Take each entry and divide by the total assets or total L+E |
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Interpret and Comute Cash Conversion Cycle
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Need:
ACP = A/R / (SALES/365) ICP = Inventory / (COGS/365) A/P Deferral = A/P / (COGS/365) Compute: ACP + ICP - A/P Def=CCC CCC is a way of determining how many days cash can come into the company and be used effectively |
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Limitations of Ratios
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It is not difficult to make statements look better than they actually are with ratios.
unusual transactions can make the company appear to be doing poorly when they are actually making a smart investment Companies' numbers can vary by seasons. but this does not mean the company is doing poorly. it is just a seasonal difference that ratios cannot show Finding a reasonable industry to compare to the company is difficult if the sell more than one product/service Industry averages are nto always desirable Every company is different. Every firm uses different accounting methods. Ratios are only clues, the numbers themselves need to be analyzed to learn anything about a company's strengths and weaknesses DEPENDENT ON GOOD FINANCIAL REPORTING. reports must be legitimate to be useful in comparing |
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Compute Market Value
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******
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Statement of Cash Flows INDIRECT
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NET INCOME
CF Operations +depr +ammort +decr CA +incr CL -decr CL -incr CA CF Investing -gain on sale of long term assets -purchase of LTA +loss on sale of long term assets +collection of loan CF Financing +stock issued +n/p issued -n/p paid -cash div paid -purchase treasury stock or own stock NONCASH purchase of LTA using NP div paid in cash issued stock by NP |
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Statement of Cash Flows DIRECT
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Cash recieved from revenues
-Cash paid for expenses =income before taxes -taxes =net cash from operating activities |
