Financial Analysis AC221

Current Assets - Current Liabilities

Working Capital Formula

Working Capital

Whether or not you have enough assets to pay off liabilities

Working Capital Use

How many short-term assets will remain if all liabilities are paid off

Current Ratio

The ability of current assets to be used to meet short-term obligations

Current Assets ÷ Current Liabilities

Current Ratio Formula

Current Ratio Use

Measurement of how well current assets cover current liabilities (want high or >1)

Quick Ratio

Ability of most liquid assets to pay off liabilities (want high number, most stringent)

Cash + ST Investments + Net Receivables ÷ Current Liabilities

Quick Ratio Formula

Quick Ratio Use

$x of current assets for every 1 dollar of current liabilities

Debt Ratio

Ability to pay off all liabilities (want smaller number—implies more funding from equity)

Total Liabilities ÷ Total Assets

Debt Ratio Formula

Debt Ratio Use

$x of liabilities for every dollar of assets (or what % of assets are coming from debt)

Times-Interest Earned Ratio

How many times you can pay off interest with income (want large number)

Times-Interest Earned Use

With a company’s income, you can pay of interest x amount of times

Operating Income ÷ Interest Expense

Times-Interest Earned Formula

Cash Flow Coverage

How much cash flow from operations is able to cover interest expense (want higher, choosing who to lend money to)

Cash Flow Coverage Use

By using cash flow from operations, the company can pay off interest x amount of times

Cash Flow from Operations ÷ Interest Expense

Cash Flow Coverage Formula

Accounts Receivable Turnover

How well you are doing collecting receivables (want high number)

AR Turnover Use

Measurement of efficiency in converting earnings to cash

Net Credit Sales ÷ Average AR (2 years)

AR Turnover Formula

Days Sales Outstanding

How many days it takes to collect AR

DSO Use

To measure the average amount of days a company can convert its receivables to cash (want low number)

365 days ÷ AR Turnover

DSO Formula

Inventory Turnover

Metric of how well a company is doing at selling inventory

IT Use

How much inventory turns to cash per year

COGS ÷ Average Inventory (2 Years)

IT Formula

Days Inventory Outstanding

Measurement of days it takes to sell inventory

DIO Use

To observe how long it takes to sell inventory on average (want low number)

365 ÷ IT

DIO Formula

Accounts Payable Turnover

Measurement of the ability to pay for inventory purchased

AP Turnover Use

To analyze how much AP turns into cash flow per year (want high number—signifies stability) (low number = holding on to money = could be positive)

Days Payable Outstanding

How many days it takes to pay off suppliers

DPO Use

Measurement of how long it takes for companies to pay their suppliers (want low number)

365 ÷ AP Turnover

DPO Formula

COGS ÷ Average Accounts Payable (2 Years)

AP Turnover Formula

Cash Conversion Cycle

Average Time from payment for inventory purchased until cash flow collection from sale of inventory (very important, want low number)

DSO + DIO - DPO

Cash Conversion Cycle Formula

Gross Margin

How efficiently a company sells its products (want high percentage)

Sales - COGS

Gross Margin Formula

Gross Margin ÷ Net Sales

Gross Margin Percentage Formula

Operating Income

What percentage of profit a company makes off its operations

Income from Operations ÷ Net Sales

Operating Income Formula

Rate of Return

The percentage of profit made on an investment relative to its cost, indicating the efficiency of the investment.

Net Income (- pref. dividends) ÷ Net Sales

Rate of Return Formula

Earnings Per Share

Measures the amount of earnings earned for common shareholders for each share of stock

Net Income (-preferred dividends) ÷ shares outstanding

Basic EPS Formula

Diluted EPS

Options that can convert into common shares, potentially affecting the total share count. (want high number)

Net Income (- pref. dividends ) ÷ Weighted Average of Outstanding Shares

Diluted EPS Formula

Asset Turnover

Sales generated from a firm’s assets (want higher)

Net Sales Revenue ÷ Average Total Assets

Asset Turnover Formula

Asset Turnover Use

How much generated in sales for every dollar invested in assets

Rate of Return on Total Assets (ROA)

Income generated for common shareholders for each dollar of assets invested in the business

Net Income (-pref. dividends) / Average Total Assets

ROA Formula

DuPont ROA

RoR (S) x Asset Turnover

Return on Equity

Measures effectiveness of managing capital provided by common equity owners (want less debt, higher return)

Net Income (-pref. dividends) ÷ Average Stockholder’s Equity

ROE Formula

Leverage

Helps increase returns for stockholders without using any additional stockholder funds

Average Total Assets ÷ Average Common Stockholder’s Equity

Leverage Formula

Price To Earnings Ratio

Market Price Relative to Earnings

Price to Earnings Use

Market Price is x higher/lower than earnings (higher = more stable investment)

Stock Price per Share ÷ Earnings Per Share

PE Ratio Formula

Dividend Yield

Measures annualized dividend payout relative to stock price

Annual DPS ÷ Market Price

Dividend Yield Formula

Dividend Yield Use

Percentage Returned for every dollar paid

Free Cash Flow

Evaluates a company’s financial flexibility

Net Cash Flow from Operations - Cash Payments for CapEx

Free Cash Flow Formula

Quality of Earnings

How faithfully represented a company’s activities are in their finances

Cash Flow from Operations ÷ Net Income

Quality of Income Formula