Financial Statement Analysis

accounts receivable analysis

An evaluation of a company’s ability to collect its accounts receivable.

accounts receivable turnover

The relationship between sales and accounts receivable, computed by dividing sales by the average accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash.

analytical methods

Methods of financial statement analysis that examine changes in the amount and percentage of financial statement items within and across periods.

asset turnover

A measure of how effectively a business is using its assets to generate sales, computed as sales divided by average total assets.

common-sized statement

A financial statement in which all items are expressed as percentages, with no dollar amounts shown.

current position analysis

An evaluation of a company’s ability to pay its current liabilities.

current ratio

A financial ratio that measures a company's ability to pay its current liabilities, computed by dividing current assets by current liabilities.

dividend yield

A profitability ratio that indicates the rate of return to common stockholders from cash dividends, computed as dividends per share of common stock divided by the market price per share of common stock.

dividends per share

A profitability ratio that measures the extent to which earnings are being distributed to common shareholders, computed as dividends on common stock divided by shares of common stock outstanding.

earnings per share (EPS) on common stock

The profitability ratio that measures the share of profits that are earned by a share of common stock, computed by dividing net income, reduced by preferred dividend requirements, by the shares of common stock outstanding.

horizontal analysis

The analysis of increases and decreases in the amount and percentage of comparative financial statement items.

inventory analysis

An evaluation of a company’s ability to manage its inventory effectively.

inventory turnover

The relationship between the cost of merchandise sold and inventory, computed by dividing the cost of merchandise sold by the average merchandise inventory.

leverage

Using debt to increase the return on an investment.

liquidity

The ability to convert assets into cash.

Management’s Discussion and Analysis (MD&A)

An annual report disclosure that provides management’s analysis of current operations and its plans for the future.

number of days’ sales in inventory

The relationship between sales and inventory, computed by dividing the average merchandise inventory by the average daily cost of merchandise sold.

number of days’ sales in receivables

An estimate of the length of time the accounts receivable have been outstanding, computed by dividing the average accounts receivable by the average daily sales.

price-earnings (P/E) ratio

A profitability ratio that measures a company’s future earnings prospects, computed as the market price per share of common stock divided by earnings per share on common stock.

profitability

The ability of a firm to earn income.

quick assets

Cash and other current assets that can be quickly converted to cash, such as marketable securities and receivables.

quick ratio

A financial ratio that measures the ability to pay current liabilities with quick assets.

ratio of fixed assets to long-term liabilities

A leverage ratio that measures the margin of safety of long-term creditors, computed as the net fixed assets divided by the long-term liabilities.

ratio of liabilities to stockholders’ equity

A comprehensive leverage ratio that measures the relationship of the claims of creditors to stockholders’ equity.

ratios

A number that expresses a financial statement item or set of financial statement items as a percentage of another financial statement item in order to measure an important economic relationship as a single number.

return on common stockholders’ equity

A measure of the rate of income earned on the amount invested by the common stockholders; computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders’ equity.

return on total assets

A measure of the profitability of total assets, without considering how the assets are financed; computed as income plus interest expense divided by average total assets.

solvency

The ability of a firm to pay its debts as they come due.

times interest earned

A ratio that measures creditor margin of safety for interest payments, computed as income before interest and taxes divided by interest expense.

unusual income statement items

Items affecting income that do not occur frequently and are typically unrelated to current operations.

vertical analysis

The percentage analysis of the relationship of each component in a financial statement to a total within the statement.

working capital

The excess of the current assets of a business over its current liabilities.