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Working with Financial Statements - Coggle Diagram
Working with
Financial Statements
Cash!flow!from!assets = Cash!flow!to!creditors + Cash!flow!to!owners
a decrease in an asset account or an increase in a liability (or
equity) account is a source of cash.
An increase in a left-hand side (asset) account or a decrease in a right-hand side (liability or equity)
account is a use of cash.
Statement of cash flows
operating activities
investment
activities.
financing activities
Standardized Financial
Statements
common-size statement
express the statement of
financial position as a percentage of total assets
express the statement of comprehensive
income as a percentage of sales
Common–Base Year Financial Statements
choose a base year and then express each item relative to the base amount
combined
common-size and base-year figures
Ratio Analysis
Short-term solvency or liquidity ratios
information
about a firm’s liquidity. Called liquidity measures
Current ratio = Current assets/Current liabilities
THE QUICK "OR ACID!TEST# RATIO
Quick ratio = Current assets-inventory/Current liabilities
Cash!ratio = (Cash + Cash!equivalents ) /Current!liabilities
Net!working!capital!to!total!assets = Net!working!capital/Total!assets
Interval!measure = Current!assets/Average!daily!operating!costs
Long-term solvency or financial leverage ratios
Asset management or turnover ratios
Profitability ratios.
Market value ratios.
Long-Term Solvency Measures. AKA Finanacial leverage ratios or leverage ratios
TOTAL DEBT RATIO=[Total assets - total equity]/total assets
debt–equity ratio= = Total debt/Total equity
Equity multiplier = Total assets/Total equity
=1+ debt-equity ratio
Long-term!debt!ratio = Long-term debt /[Long-term!debt + Total!equity]
Total capitalization= Long term debt + Total equity
TIMES INTEREST EARNED
TIE ratio = EBIT/Interest
CASH COVERAGE
Cash coverage!ratio = [ EBIT + Depreciation ] / Interest
EBITDA. pg 83
Asset Management, or Turnover, Measures
asset utilization ratios
Inventory turnover = Cost of goods sold/Inventory
average days’ sales in inventory
(also known as the “inventory period”):
365 days/ Inventory turnover
average inventory
in calculating turnover.
average as (Beginning value + Ending value)⁄2.
RECEIVABLES TURNOVER AND DAYS’ SALES IN RECEIVABLES
Receivables turnover = Sales/Accounts receivable
Here sales is the total credit sales
days’ sales in receivables
Days’!sales!in!receivables = 365!days/Receivables!turnover
average collection period (ACP) or days’ sales outstanding
(DSO)
accounts payable turnover rate
Cost of goods/accounts payable. pg 85 example
Asset turnover ratio
NWC ratio= Sales /NWC
High value is prefered
Fixed asset turnover=sales/Net fixed assets
total asset turnover= Sales/ total assets
Profitability Measures
Profit!margin = Net!income/Sales
Gross profit margin= Sales-Cost of goods sold]/Sales
Operating!profit!margin = (Sales − COGS − SGA)/Sales
RETURN ON ASSETS= Net Income /Total assets
Return on Equity=Net Income/ Total Income pg 86
ROE is sometimes called return on net worth
These are all accounting figures. So can be called book assets and book equity
Market Value Measures
Market price per share of the stock
EPS = Net Income/ shares outstanding
PRICE/EARNINGS RATIO
P/E!ratio = Price!per!share/Earnings!per!share
higher P/Es are often taken to mean that the firm has significant prospects for future
If a firm had
no or almost no earnings, its P/E would probably be quite large; so, as always, care is needed in
interpreting this ratio
PEG RATIO
PEG!ratio = P/E!ratio/Expected!future!earnings!growth!rate × 100
PEG ratios suggest that the P/E may be too high relative to growth, and vice
versa.
MARKET!TO!BOOK RATIO
Market value per share/ book value per share
Notice that book value per share is total equity (not just common stock) divided by the number
of shares outstanding
A value less than 1 could mean that the firm has not been successful overall in creating
value for its shareholders
EV/EBITDA!multiple
Market!value!of!equity + market!value!of!interest-bearing!debt− Cash!(and!cash!equivalents)]/EBITDA
enterprise value/earnings before interest, tax, depreciation, and amortization
EV/EBITDA looks to examine how many times more
a firm’s capital holders value the company relative to the cash flow the company generates
Table 3.8 pg 90
The DuPont Identity
ROA and ROE
ROE = ROA × Equity!multiplier = ROA! × !(1 + Debt–Equity!ratio )
ROE= Profit!margin × Total!asset!turnover × Equity!multiplier
The DuPont identity tells us that ROE is affected by three things
Operating efficiency (as measured by profit margin).
Asset use efficiency (as measured by total asset turnover).
Financial leverage (as measured by the equity multiplier).