Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
68 Cards in this Set
- Front
- Back
|
The maximum possible growth rate for a firm that maintains a constant debt ration and doesn't sell new stock is called the _________________________.
|
sustainable growth rate = ROE*b 1-ROE*b where b is retention ratio (plowback) b = addition to RE/net income = 1-dividend payout ratio |
|
|
Asset utilization (turnover) ratio that measures the dollar investment in assets necessary to generate $1 in sales.
|
capital intensity ratio = 1/total asset turnover |
|
|
Turnover ratios all have one of two figures as numerators. What are these two figures?
|
cost of goods sold, sales
|
|
|
What do turnover ratios measure? How do you interpret the results?
|
|
|
|
What are the eight (8) turnover ratios? |
|
|
|
A profitability measure that gives us the amount of profit generated per $1 of sales.
|
profit margin = net income sales |
|
|
The _____________ is a variation on the total debt ratio that compares total assets per $1 of equity.
|
equity multiplier = total assets total equity |
|
|
A profitability measure that gives us the amount of profit generated per $1 in assets.
|
return on assets = net income/total assets = profit margin*total asset turnover |
|
|
A profitability measure that gives us the amount of profit for every $1 in equity. In an accounting sense, the true bottom-line measure of performance.
|
return on equity = net income total equity = return on assets*equity multiplier |
|
|
What are the equations for the most important profitability ratios?
|
ROE = net income * sales * assets sales assets equity |
|
|
A market value measure that gives us the amount of net income per share.
|
earnings per share (EPS) = net income shares outstanding |
|
|
A market value measure that tells us how much investors are willing to pay per $1 of current earnings.
|
price-earnings (PE) ratio = price per share earnings per share PE = PPS/EPS |
|
|
True OR False: Higher PEs always mean that a firm has significant prospects for future growth. |
False. Although this is often the case, if a firm had no or almost no earnings its PE would also be quite large. Care must be taken when interpreting this ratio.
|
|
|
This market value ratio measures sales per share compared to price per share.
|
price-sales ratio = price per share sales per share |
|
|
A market value ratio that gives us the market value as compared to book value. For example, a result of 1.5 would indicate a market value of one-and-a-half times the book value.
|
market-to-book ratio = market value per share book value per share (NOTE: Book value per share = total equity/shares outstanding) |
|
|
This market value ratio estimates the market value of a company's operating assets.
|
EBITDA ratio = enterprise value EBITDA (enterprise value = total market value of stock + book value of all liabilities - cash) |
|
|
What are some of the most important market value ratios?
|
|
|
|
A popular expression breaking ROE into three (3) parts; operating efficiency (profit margin), asset use efficiency (total asset turnover), and financial leverage (equity multiplier).
|
The DuPont Identity ROE = net income = net income*assets total equity total equity assets = net income*assets *sales assets total equity sales = net income*sales * assets ------------ROA------------ total equity = profit margin*TAT*equity multiplier |
|
|
Asset utilization (turnover) ratio that measures sales generated per $1 in assets.
|
total asset turnover = sales total assets |
|
|
The ____________ takes into account all debts of all maturities to all creditors, and compares debt to assets.
|
total debt ratio = total assets - total equity total assets variations include: debt-equity ratio = total debt/total equity equity multiplier = total assets/total equity = 1+debt-equity ratio |
|
|
An asset utilization (turnover) ratio that measures the average number of days it takes to collect on credit sales. Also known as the average collection period (ACP).
|
days' sales in receivables = 365 days receivables turnover |
|
|
An asset utilization (turnover) ratio that measures the number of times per year accounts receivable is collected and re-loaned.
|
receivables turnover = sales accounts receivable |
|
|
An asset utilization (turnover) ratio that tells us the average number of days that inventory sits on the shelf before being sold.
|
days' sales in inventory = 365 days inventory turnover |
|
|
An asset utilization (turnover) ratio that measures how quickly inventory is being sold.
|
inventory turnover = cost of goods sold (COGS) inventory |
|
|
What do financial leverage ratios measure? Name some of the most important ones.
|
long-term solvency
total assets 2. debt-equity ratio = total debt/total equity 3. equity multiplier = total assets/total equity 4. times interest earned ratio = EBIT/interest 5. cash coverage ratio = EBIT+depreciation interest |
|
|
The __________ ratio is a basic measure of a firm's ability to generate cash from operations and is used to measure cash flow available to meet financial obligations.
|
cash coverage ratio (EBITD) = EBIT + depreciation interest |
|
|
Given the total debt ratio, what other ratios can be computed?
|
debt-equity ratio = total debt/total equity AND equity multiplier = total assets/total equity = 1+debt-equity ratio |
|
|
The _____________ ratio measures how well a company has its interest obligations covered.
|
times interest earned (TIE) = EBIT interest |
|
|
The maximum possible growth rate for a firm that relies only on internal financing.
|
internal growth rate = ROA*b 1-ROA*b ROA = net income/total assets b = plowback (retention) ratio = addition to RE/net income = 1-dividend payout ratio |
|
|
What do liquidity ratios measure? Name some of them.
|
short-term solvency
|
|
|
A very short-term creditor might be interested in the ___________, which measures the amount of cash on hand as compared to current liabilities.
|
cash ratio = cash current liabilities |
|
|
To further evaluate liquidity, the ___________ ratio is computed just like the current ratio, except inventory is omitted.
|
quick ratio (or acid-test ratio) = current assets - inventory current liabilities |
|
|
The ____________ is a measure of short-term liquidity that measures the relationship between current assets and current liabilities.
|
current ratio = current assets current liabilities (creditors prefer higher current ratio, but too high indicates an inefficient use of cash) |
|
|
What are the five (5) groups of ratios?
|
|
|
|
Financial statement showing a firm's accounting value on a particular date.
|
balance sheet
|
|
|
Financial statement summarizing a firm's performance over a period of time.
|
income statement
|
|
|
Relationships determined from a firm's financial information and used for comparison purposes.
|
financial ratios
|
|
|
Describe how common-size balance sheets and income statements are formed?
|
Common-size balance sheets are formed by expressing each item as a percentage of total assets. Common-size income statements are formed by expressing each item as a percentage of total sales. |
|
|
Why is it often necessary to standardize financial statements?
|
In order to make comparisons of different-sized companies, often by converting amounts to percentages.
|
|
|
A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.
|
common-size statement
|
|
|
What are some of the problems that can come up with financial statement analysis?
|
|
|
|
Why do we say that financial statement analysis is management by exception?
|
Because in many cases analysis will boil down to comparing ratios for one business with some kind of average or representative ratios.
|
|
|
What are some uses for financial statement analysis?
|
|
|
|
True OR False: Companies that are clearly in the same line of business are always comparable. |
False. For example, electric utilities are all classified under SIC code 4911; however, utilities often operate as regulated monopolies and don't compete with each other. Also, the means of generating power, as well as associated policies/regulation greatly affect profitability.
|
|
|
True OR False: Comparing financial statements across national borders is a simple process. |
False. The existence of different standards and procedures makes it very difficult to compare financial statements across national borders.
|
|
|
True OR False: Peer group analysis works best when firms are strictly in the same line of business, the industry is competitive, and there is only one way of operating. |
True.
|
|
|
A group of firms that compete in the same market, have similar assets, and operate in similar ways is called a(n) ______________.
|
peer group
|
|
|
A group of top firms within a particular industry is called a(n) ____________.
|
aspirant group
|
|
|
The _______________ was instituted in 1997 and is intended to eventually replace the SIC code system.
|
NAICS ("nakes") North American Industry Classification System |
|
|
Name two (2) ways of determining a benchmark or standard of comparison in financial statement analysis?
|
|
|
|
U.S. government code used to classify a firm by its type of business operations.
|
Standard Industrial Classification (SIC) Code
|
|
|
The primary external uses of financial statement information are _______________.
|
|
|
|
The primary internal uses of financial statement information are _________________.
|
|
|
|
A firm's ability to sustain growth depends on what four (4) factors?
|
|
|
|
What does a firm's internal growth rate tell us?
|
It tells us how much a firm can grow if it relies solely on internal financing.
|
|
|
What does a firm's sustainable growth rate tell us?
|
It tells us the maximum growth rate that can be achieved if a firm (1) wishes to maintain a particular total debt ratio, and (2) is unwilling to sell new stock.
|
|
|
__________ financing refers to funds raised by either borrowing money or selling stock.
|
external
|
|
|
__________ financing refers to what the firm earns and subsequently puts back into the business.
|
internal
|
|
|
A firm has two broad sources of financing: __________ and __________.
|
internal, external
|
|
|
True OR False: In the long run, if sales are to grow, assets have to grow as well. |
True. Further, if assets are to grow then they must be financed, so a firm's ability to grow depends on its financing policies.
|
|
|
The ____________ is also known as the plowback ratio because it is, in effect, the portion of net income that is plowed back into the business.
|
retention ratio = addition to retained earnings net income |
|
|
If we express dividends paid as a percentage of net income, the result is the _________________.
|
dividend payout ratio = cash dividends net income (percentage of income paid out in dividends) |
|
|
A firm's net income gets divided into what two (2) pieces?
|
cash dividends to stockholders AND addition to retained earnings |
|
|
What is the sustainable growth rate likely to be larger than the internal growth rate?
|
Because as a firm grows, it will have to borrow additional funds if it is to maintain a constant debt ratio.
|
|
|
Reducing inventory holdings through more efficient management ________ current assets, which _______ total assets, which then _______ total asset turnover.
|
reduces, reduces, improves
|
|
|
Return on assets (ROA) can be expressed as the product of which two (2) ratios?
|
profit margin*total asset turnover
|
|
|
Return on equity (ROE) can be expressed as the product of which three (3) ratios?
|
profit margin*total asset turnover*energy mult.
|
|
|
Weakness in either operating or asset use efficiency (or both) will show up in a ________ ROA, which will translate into a _________ ROE.
|
diminished, lower
|
