Ch 3 Fin Man

Activities that bring in cash

Sources of cash

Activities that involve spending cash

Uses of cash

Loosely speaking, an increase in assets means:

The firm, on a net bais, bought some assets - a use of cash

If an asset went down:

The firm sold some assets - a source of cash.

If a liability goes down

The company paid off that liability - a use of cash.

An increase in a left side (asset) account or a decrease in the right side (liability) account:

Would be a use of cash

An decrease in a left side (asset) account or an increase in the right side (liability) account:

Would be a source of cash

The net addition to cash is:

Total sources - total uses

Common size statements

balance sheet - as a percentage of assets

income statement - as a percentage of sales

common size balance sheet

as a percentage of assets

common size income statement

as a percentage of sales

Common size statement of cash flows can be expressed as:

a percentage of total sources (or uses)

Financial rations

Also help avoiding problems in financial statement comparison

There are five financial ratio groups

1. Short term solvency

2. Long term solvency

3. Asset management

4. Profitability ratios

5. Market value ratios

Current ratio:

current assets / current liabilities

The current ratio is a measure of

Short-term liquidity

To a creditor, the higher the current ratio

The better

To further evaluate liquidity, we can use the quick ratio:

current assets - inventory / current liabilities

Using cash to buy inventory does not affect the current ratio but decreases the

quick ratio

The most short term liquidity ratio is the

Cash ratio

Cash ratio:

Cash / current liabilities

Net working capital is commonly viewed as the level of liquiduty a firm has, so we can consider this ratio:

Net working capital to total assets

Net working capital to total assets ratio:

Net working capital / total assets

Cash inflows dry up? Use this ratio:

Interval measure

Interval measure ratio:

Current assets / Average daily operating costs

Total debt ratio:

Total assets - total equity / Total assets

This is because assets - equity = liability

You use the total debt ratio to find the:

Debt-equity ratio

1 - total debt ratio

You take that answer, which is equity

Divide total debt / the new nifty equity number you have

The equity multiplier is

1 + debt equiity ratio

Long term debt ratio

Long term debt / long term debt + total equity

Times interest earned ratio

EBIT. / Interest

Cash coverage ratio

EBIT + depreciation / Interest

Inventory turnover ratio

Cost of gods sold / inventory

Days sales in inventory

365 days / Inventory turnover

Receivables turnover

Sales / Accounts Receivable

Days sales in recaivable

365 days / receivables turnover

NWC

Sales / NWC

Fixed asset turnover

Sales / Net fixed assets

Total asset turnover

Sales / Total Assets

Profit margin

Net income / sales

Return on assets

Net income / total assets

Return on equity

Net income / total equity

PE Ratio

Price per share / earnings per share

Market to book ratio

market value per share / boook value per share

Enterprise value

Total market value of the stock + book value of all liabilities - cash

EBITDA

enterprise value / EBITDA

First you find the inventory turnover rate to find the

Days sales in inventory

Total capitalization equals:

total equity + total long-term debt

A times interest earned (TIE) ratio of 3.5 times means a firm has Blank______ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

A firm has a total debt ratio of 0.30 times. This means the firm has Blank______ in total debt for every $1 in total assets.

$0.30

Which of the following represents the receivables turnover ratio?

Sales / accounts receivable

A firm with a profit margin of 6.8 percent generates Blank______ cents in net income for every one dollar in sales.

6.8

Investment activity

Changes in fixed assets, ie buying property plant or equipment

Operating activity

includes net income and changes in current accounts

Financing activity

Where am I raising money from?

Debt is

Asset - equity

A company that is not leveraged

Less debt than equity

As a bondhlder I want to know how many times your earnings ocver my debt

Hence the times interest earned ratio

Ideally in. afirm you want your

Receivables faster and your payables slower

ROE =

profit margin + total asset turnover * equity multiplier