Financial Statement Analysis Flashcards

Flashcards on Financial Statement Analysis

Financial Statement Analysis

Enables the financial statement user to make informed decisions about a company.

FS analysis involves

The evaluation of an entity’s past performance, present condition, and business potentials by way of analyzing the financial statements.

Three major characteristics of a company generally evaluated

Liquidity, Profitability, and Solvency

Intracompany basis

Compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.

Industry averages

Compares an item or financial relationship of a company with industry averages.

Intercompany basis

Compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.

Three basic tools of Financial Analysis

Horizontal, Vertical, and Ratio Analysis.

Horizontal Analysis

A technique for evaluating a series of financial statement data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage.

Vertical Analysis

Expresses each item within a financial statement as a percent of a base amount.

Liquidity ratios

Measures of the short-term debt-paying ability.

Profitability ratios

Measures of the income or operating success of an enterprise for a given period of time.

Solvency ratios

Measures of the ability of the enterprise to survive over a long period of time.

Four liquidity ratios

Current ratio, Acid test ratio, Receivables turnover, and Inventory turnover

Current Ratio

Expresses the relationship of current assets to current liabilities.

Acid-Test or Quick Ratio

Relates cash, short-term investments, and net receivables to current liabilities and indicates a company’s immediate liquidity.

Receivables Turnover Ratio

Used to assess the liquidity of the receivables and measures the number of times, on average, receivables are collected during the period.

Inventory Turnover

Measures the number of times, on average, the inventory is sold during the period.

Profit Margin

A measure of the percentage of each peso of sales that results in net income.

Asset Turnover

Measures how efficiently a company uses its assets to generate sales.

Return on Assets

An overall measure of profitability, computed by dividing net income by average assets.

Return on Common Stockholders’ Equity

Shows how many pesos of net income the company earned for each peso invested by the owners.

Earnings Per Share

A measure of the net income earned on each share of common stock.

Price-Earnings Ratio

A measure of the ratio of the market price of each share of common stock to the earnings per share.

Payout Ratio

Measures the percentage of earnings distributed in the form of cash dividends.

Debt to Total Assets Ratio

Measures the percentage of the total assets that creditors provide.

Times Interest Earned (Interest Coverage Ratio)

Provides an indication of the company’s ability to meet interest payments as they come due.

Average Age of Receivables (Average Collection Period) (Days’ in Receivables)

Indicates the average number of days during which the company must wait before receivables are collected.

Average Age of Inventory* (Inventory Conversion Period) (Days’ in Inventory)

It indicates the average number of days during which the company must wait before the inventories are sold.

Accounts Payable Turnover

It measures the speed with which a company pays its suppliers.

Normal Operating Cycle

The time it takes a company to acquire inventory, sell that inventory, and receive cash from its customers in exchange for the inventory sold.

Cash Conversion Cycle

The time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

Return on Sales (Net Profit Margin)

Determines the portion of sales that went into company’s earnings.

Return on Equity

Measures the amount earned on the owner’s or stockholders’ investment.

Operating Profit Margin

Measures profit generated after consideration of operating costs.

Cash Flow Margin

Measures the ability of the firm to translate sales to cash.

Price-Earnings (PE) Ratio

Indicates the number of pesos required to buy P1 of earnings.

Dividend Yield

Measures the rate of return in the investor’s common stock investments.

Dividend Pay-out Ratio

It indicates the proportion of earnings distributed as dividends.

Debt Ratio

Proportion of total assets provided by creditors.

Equity Ratio

Proportion of total assets provided by owners.