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51 Cards in this Set

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Limitations of Financial Statement Analysis
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.
Financial ratios of interest to common stockholders
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
Financial ratios of interest to short-term creditors (suppliers)
1. Working Capital
2. Current Ratio
3. Acid-test (Quick) Ratio
4. Accounts Receivable Turnover
5. Inventory Turnover Ratio
Financial ratios of interest to long-term creditors
1. Times Interest Earned Ratio
2. Debt-To-Equity Ratio
Horizontal Analysis
A side-by-side comparison of of two or more years' financial statements.
Vertical Analysis
The presentation of a company's financial statements in common-size form.
3 Primary tools used in financial statement analysis
1. Comparative Statements (horizontal analysis).

2. Common-size Statements (vertical analysis).

3. Ratios.
Comparative Statements
Financial statements that show changes in line items from one year to the next expressed in dollars and percent. Compares each line item.
Common-size Statements
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).
Horizontal Analysis is also known as...
Trend Analysis
Gross Margin (Gross Profit)
Sales Revenue - Cost of Goods Sold
Gross Margin Percentage
Gross Margin
---------------------
Sales

(measure of profitability)
Earnings Per Share
Net income - Preferred dividends
-----------------------------------------------
Average number of common shares outstanding
Net Income Available For Common Stockholders =
Net Income - Preferred Dividends
Price Earnings Ratio
Market Price Per Share
----------------------------------
Earnings Per Share

(states that a stock is selling for ___ times its earnings per share)
Dividend Payout Ratio
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)
2 Ways investors in stock make money
1. Capital gains
2. Dividends
Companies with excellent prospects for profitable growth...
often pay little or no dividend.
Companies with limited opportunity for profitable growth, but with steady, dependable earnings,...
often pay out higher dividends.
Dividend Yield Ratio
Dividends Per Share
-----------------------------
Market Price Per Share

(measures the rate of return from dividends only)
Return On Total Assets
Net Income + [Interest Expense x (1 - Tax rate)]
----------------------------------------------------------------------
Average Total Assets

(a measure of operating performance)
Return On Common Stockholders' Equity
Net Income - Preferred Dividends
-----------------------------------------------
Average Common Stockholders' Equity
To measure the effectiveness of financial leverage...
Compare: Return On Total Assets with Return On Common Stockholders' Equity
Average Common Stockholders' Equity
Average Total Stockholders' Equity - Average Preferred Stock
Financial Leverage
Difference between the rate of return on assets and the rate paid to creditors.
Positive Financial Leverage exists if...
the rate of Return On Total Assets exceeds the rate of return paid to creditors.
Negative Financial Leverage exists if...
the rate of Return On Total Assets is less than the rate of return paid to creditors.
Positive Financial Leverage benefits...
the stockholders.
Some debt in a company's capital structure can be beneficial if...
Positive Financial Leverage exists.
Book Value Per Share
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)
If Market Value Per Share exceeds Book Value Per Share...
the stock may appear to be overpriced.
Market prices reflect expectation about...
1. Future earnings
2. Future dividends
Ordinarily, the market value of a stock...
exceeds its book value.

(because of anticipated future earnings and dividends)
Working Capital
Current Assets - Current Liabilities
Current Asset
Assets that will be converted to cash or consumed within one year or an operating cycle, whichever is longer.
Current Liability
Obligation due within one year or an operating cycle, whichever is longer.
Working Capital must be financed with:
1. Long-term debt
2. Equity

(both are expensive)
A large and growing Working Capital balance may not be a good sign because it could be a result of...
unwarranted growth in inventories.
Current Ratio
Current Assets
----------------------
Current Liabilities

(measures short-term debt-paying ability)
Usually, Current Ratios should be at least___.
2
Even with a Current Ratio of 2 or better, companies may have difficulties meeting financial obligations if the majority of their assets are...
less liquid (i.e. inventories).
The Acid-Test (Quick) Ratio is a more rigorous test of a company's ability to meet its short-term debts than the...
Current Ratio.
Acid-Test (Quick) Ratio
Cash + Marketable Securities + Accounts Receivable
+ Short-Term Notes Receivable
-------------------------------------------------------------------------------
Current Liabilities

("quick" assets are more liquid assets)
Ideally, each dollar of liability should be backed by at least...
1 dollar of quick assets.
Accounts Receivable Turnover
Sales On Account
-------------------------------------------------------
Average Accounts Receivable Balance

(measures how quickly credit sales are converted into cash)

(greater is better)
Average Collection Period
365 days
-------------------------------------------
Accounts Receivable Turnover

(measures in days how quickly credit sales are collected)
Inventory Turnover
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)
Average Sale Period
365 days
-------------------------
Inventory Turnover

(measures the number of days needed on average to sell the entire inventory)
Times Interest Earned Ratio
Earnings before interest expense and income taxes
----------------------------------------------------------------------------
Interest Expense

(measures ability to repay long-term loans)
Times Interest Earned Ratio should be at least___in order to protect long-term creditors.
2
Debt-To-Equity Ratio
Total Liabilities
------------------------------
Stockholders' Equity

(measures ability to reasonably balance debt to equity)