Financial Statement Analysis

Flashcards for key vocabulary and concepts related to financial statement analysis, including ratio analysis, profitability, liquidity, solvency, and common-size statements.

Ratio analysis

Relationship among various account balances; Removes the “size” effect to allow comparisons of firms of difference sizes or firms over time; Allows one to investigate the relationships between financial figures- often there is more information in the relationship between figures than in an individual figure.

GAAP Limitations of Ratio analysis

Non-capitalized costs and Historical costs.

Return on Assets (ROA)

Measures the return generated by a company’s assets. ROA = Net Income / Average Total Assets

Profit Margin (PM)

Measures how much profit the company earns from each sales dollar. PM = Net Income / Sales Revenue

Asset Turnover (AT)

Measures the productivity of the company’s assets. AT = Sales Revenue / Average Total Assets

Return on Equity (ROE)

Measures the profit generated from the resources that owners provide. ROE = Net Income / Average Shareholders’ Equity

Liquidity

Refers to cash: how much we have, how much is expected, and how much can be raised on short notice.

Current Assets

Those assets that a company expects to convert into cash within the next year.

Current Liabilities

Those liabilities that come due within the next year.

Working Capital

An excess of current assets over current liabilities. Working Capital = Current Assets - Current Liabilities

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

Cash + Marketable Securities + A/R / Current Liabilities

Solvency

Refers to a company’s ability to meet its debt obligations.

Leverage

Describes how a company is financed.

Debt-to-Equity

Total Liabilities / Shareholders' Equity

Receivables Turnover

Sales Revenue / Average Accounts Receivable

Average Collection Period

365 / Receivables Turnover

Inventory Turnover

Cost of Goods Sold / Average Inventory

Average Days Inventory Held

365 / Inventory Turnover

Payables Turnover

Cost of Goods Sold / Average Accounts Payable

Average Days Payables

365 / Payables Turnover

Days in Financing

Days in Inventory + Days in A/R – Days in Payables

Common-size financial statements (Vertical analysis)

Express each item as a percentage of a total amount within the same year.

Trend statements (Horizontal analysis)

Express each item as a percentage of the same item in another year (base year).