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51 Cards in this Set
- Front
- Back
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Limitations of Financial Statement Analysis
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1. Comparability: Differences in accounting methods between companies (i.e. inventory costing) make it difficult to compare their financial data.
2. Look beyond the ratios: Should be viewed as a starting point and raise additional questions. |
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Financial ratios of interest to common stockholders
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1. Earnings Per Share
2. Price-Earnings Ratio 3. Dividend Payout Ratio 4. Dividend Yield Ratio 5.Return on Total Assets 6. Book Value Per Share 7. Return on Common Stockholder's Equity |
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Financial ratios of interest to short-term creditors (suppliers)
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1. Working Capital
2. Current Ratio 3. Acid-test (Quick) Ratio 4. Accounts Receivable Turnover 5. Inventory Turnover Ratio |
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Financial ratios of interest to long-term creditors
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1. Times Interest Earned Ratio
2. Debt-To-Equity Ratio |
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Horizontal Analysis
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A side-by-side comparison of of two or more years' financial statements.
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Vertical Analysis
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The presentation of a company's financial statements in common-size form.
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3 Primary tools used in financial statement analysis
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1. Comparative Statements (horizontal analysis).
2. Common-size Statements (vertical analysis). 3. Ratios. |
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Comparative Statements
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Financial statements that show changes in line items from one year to the next expressed in dollars and percent. Compares each line item.
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Common-size Statements
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Financial statements that show changes in line items from one year to the next expressed as a percentage of assets, or of liabilities and stockholders' equity (balance sheet), or as a percentage of sales (income statement).
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Horizontal Analysis is also known as...
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Trend Analysis
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Gross Margin (Gross Profit)
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Sales Revenue - Cost of Goods Sold
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Gross Margin Percentage
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Gross Margin
--------------------- Sales (measure of profitability) |
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Earnings Per Share
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Net income - Preferred dividends
----------------------------------------------- Average number of common shares outstanding |
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Net Income Available For Common Stockholders =
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Net Income - Preferred Dividends
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Price Earnings Ratio
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Market Price Per Share
---------------------------------- Earnings Per Share (states that a stock is selling for ___ times its earnings per share) |
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Dividend Payout Ratio
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Dividends Per Share
----------------------------- Earnings Per Share (a measure of current earnings being paid out as dividends) (there is no "correct" payout ratio) (companies within the same industry often have similar payout ratios) |
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2 Ways investors in stock make money
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1. Capital gains
2. Dividends |
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Companies with excellent prospects for profitable growth...
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often pay little or no dividend.
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Companies with limited opportunity for profitable growth, but with steady, dependable earnings,...
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often pay out higher dividends.
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Dividend Yield Ratio
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Dividends Per Share
----------------------------- Market Price Per Share (measures the rate of return from dividends only) |
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Return On Total Assets
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Net Income + [Interest Expense x (1 - Tax rate)]
---------------------------------------------------------------------- Average Total Assets (a measure of operating performance) |
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Return On Common Stockholders' Equity
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Net Income - Preferred Dividends
----------------------------------------------- Average Common Stockholders' Equity |
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To measure the effectiveness of financial leverage...
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Compare: Return On Total Assets with Return On Common Stockholders' Equity
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Average Common Stockholders' Equity
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Average Total Stockholders' Equity - Average Preferred Stock
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Financial Leverage
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Difference between the rate of return on assets and the rate paid to creditors.
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Positive Financial Leverage exists if...
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the rate of Return On Total Assets exceeds the rate of return paid to creditors.
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Negative Financial Leverage exists if...
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the rate of Return On Total Assets is less than the rate of return paid to creditors.
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Positive Financial Leverage benefits...
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the stockholders.
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Some debt in a company's capital structure can be beneficial if...
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Positive Financial Leverage exists.
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Book Value Per Share
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Total Stockholders' Equity - Preferred Stock
----------------------------------------------------------------- number of Common Shares Outstanding (measures the amount that would go to common stockholders if all assets were sold at their book values) |
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If Market Value Per Share exceeds Book Value Per Share...
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the stock may appear to be overpriced.
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Market prices reflect expectation about...
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1. Future earnings
2. Future dividends |
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Ordinarily, the market value of a stock...
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exceeds its book value.
(because of anticipated future earnings and dividends) |
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Working Capital
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Current Assets - Current Liabilities
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Current Asset
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Assets that will be converted to cash or consumed within one year or an operating cycle, whichever is longer.
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Current Liability
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Obligation due within one year or an operating cycle, whichever is longer.
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Working Capital must be financed with:
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1. Long-term debt
2. Equity (both are expensive) |
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A large and growing Working Capital balance may not be a good sign because it could be a result of...
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unwarranted growth in inventories.
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Current Ratio
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Current Assets
---------------------- Current Liabilities (measures short-term debt-paying ability) |
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Usually, Current Ratios should be at least___.
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2
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Even with a Current Ratio of 2 or better, companies may have difficulties meeting financial obligations if the majority of their assets are...
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less liquid (i.e. inventories).
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The Acid-Test (Quick) Ratio is a more rigorous test of a company's ability to meet its short-term debts than the...
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Current Ratio.
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Acid-Test (Quick) Ratio
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Cash + Marketable Securities + Accounts Receivable
+ Short-Term Notes Receivable ------------------------------------------------------------------------------- Current Liabilities ("quick" assets are more liquid assets) |
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Ideally, each dollar of liability should be backed by at least...
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1 dollar of quick assets.
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Accounts Receivable Turnover
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Sales On Account
------------------------------------------------------- Average Accounts Receivable Balance (measures how quickly credit sales are converted into cash) (greater is better) |
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Average Collection Period
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365 days
------------------------------------------- Accounts Receivable Turnover (measures in days how quickly credit sales are collected) |
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Inventory Turnover
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Cost Of Goods Sold
-------------------------------------- Average Inventory Balance (measures how many times a company's inventory has been sold and replaced during the year) (greater is better) |
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Average Sale Period
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365 days
------------------------- Inventory Turnover (measures the number of days needed on average to sell the entire inventory) |
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Times Interest Earned Ratio
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Earnings before interest expense and income taxes
---------------------------------------------------------------------------- Interest Expense (measures ability to repay long-term loans) |
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Times Interest Earned Ratio should be at least___in order to protect long-term creditors.
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2
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Debt-To-Equity Ratio
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Total Liabilities
------------------------------ Stockholders' Equity (measures ability to reasonably balance debt to equity) |
