terms for financial analysis statement

What is common-sizing?

Turning financial statement numbers into percentages so they’re easier to compare. Income statement = each line ÷ revenue. Balance sheet = each line ÷ total assets

What is common-sizing used for?

To compare companies of different sizes and spot trends over time

What is the difference between ROE and ROA?

ROA shows profit from total assets. ROE shows profit created for shareholders. If ROE is much higher than ROA, it usually means the company uses a lot of debt.

How does the income statement tell a story?

It shows how revenue is turned into profit after all expenses. It tells the story of profitability.

How does the balance sheet tell a story?

It shows what the company owns (assets), what it owes (liabilities), and what belongs to shareholders (equity).

How does the cash flow statement tell a story?

It shows where cash comes from and where it goes: operating, investing, and financing activities.

How is interest coverage calculated

EBIT ÷ interest expense.

How is interest coverage interpreted?

Higher = safer. Lower = riskier because the company may struggle to pay interest.

What is fixed asset turnover?

Sales ÷ average net fixed assets.

What does fixed asset turnover indicate?

How efficiently the company uses buildings and equipment to generate sales.

What is the meaning of Days Sales Outstanding (DSO)?

How many days customers take to pay. Lower = better.

Why is DSO important?

Slow payments weaken cash flow and liquidity.

Why is DIO important?

High DIO means slow-moving inventory and possible overstock issues.

What are the main limitations of ratio analysis?

Ratios don’t consider industry differences, inflation, one-time events, or management judgment. Ratios must be compared to something.

Why is industry context important for interpreting ratios?

Different industries have very different “normal” levels for margins, leverage, and turnover.

What does a high ROE with a low ROA suggest?

The company is using a lot of debt (financial leverage).

How can I assess efficiency and productivity?

Use turnover ratios (A/R, A/P, inventory, fixed asset turnover) and compare year-over-year trends.

What does a rising DPO tell me?

The company is taking longer to pay suppliers and is holding onto cash longer.

How do I compare two companies using common-sized financials?

Compare each line as a percentage of revenue (income statement) or total assets (balance sheet) to see differences in cost structure and financial strength.

How can a company have negative profit margins but still perform well?

Strong cash flow, large non-cash expenses like depreciation, high growth investments, or temporary losses.

What does declining interest coverage tell us?

The company is becoming riskier because EBIT is falling or interest expense is increasing.

How do gross, operating, and profit margins explain differences between similar companies?

Gross margin shows pricing and production efficiency. Operating margin shows SG&A efficiency. Net margin shows total profitability after all costs.

How can I track improvement using year-over-year common-size income statements?

Look at trends in percentages: lower COGS%, lower SG&A%, and rising margins mean improvement.

What does a high gross margin but low net income tell us?

Operating expenses or interest costs are too high.

What are ways a company can pay a dividend without enough operating cash flow?

Borrowing money, using cash reserves, or selling assets.