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WORKING WITH FINANCIAL STATEMENTS, GARAY LÓPEZ ANA ERANDI, 2CV8 - Coggle…
WORKING WITH FINANCIAL STATEMENTS
CASH FLOW AND FINANCIAL STATEMENTS: A CLOSER LOOK
SOURCES AND USES OF CASH
Activities that bring in cash are called sources of cash. Activities that involve spending cash are called uses (or applications) of cash.
THE STATEMENT OF CASH FLOWS
A firm financial statement that summarizes its sources and uses of cash over a specified period.
STANDARDIZED FINANCIAL STATEMENTS
COMMON-SIZE STATEMENTS
A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.
COMMON–BASE YEAR FINANCIAL STATEMENTS: TREND ANALYSIS
A standardized financial statement presenting all items relative to a certain base year amount.
COMBINED COMMON-SIZE AND BASE YEAR ANALYSIS
The reason for doing this is that as total assets grow, most of the other accounts must grow as well.
RATIO ANALYSIS
Relationships determined from a firm’s financial information and used for comparison purposes.
SHORT-TERM SOLVENCY, OR LIQUIDITY, MEASURES
As the name suggests, short-term solvency ratios as a group are intended to provide information about a firm’s liquidity, and these ratios are sometimes called liquidity measures.
Current Ratio: One of the best known and most widely used ratios is the current ratio.
The Quick (or Acid-Test) Ratio:Inventory is often the least liquid current asset. It’s also the one for which the book values are least reliable as measures of market value because the quality of the inventory isn’t considered.
Other Liquidity Ratios: Cash ratio,Networking capital to total assets,Interval measure
LONG-TERM SOLVENCY MEASURES
Long-term solvency ratios are intended to address the firm’s long-term ability to meet its obligations, or, more generally, its financial leverage.
Total Debt Ratio: The total debt ratio takes into account all debts of all maturities to all creditors.
A Brief Digression: Total Capitalization versus Total Assets Frequently, financial analysts are more concerned with a firm’s long-term debt than its short-term debt because the short-term debt will constantly be changing.
Times Interest Earned Another common measure of long-term solvency is the times interest earned (TIE) ratio.
Cash Coverage A problem with the TIE ratio is that it is based on EBIT, which is not really a measure of cash available to pay interest. The reason is that depreciation, a noncash expense, has been deducted out.
ASSET MANAGEMENT, OR TURNOVER, MEASURES
We next turn our attention to the effi ciency with which Prufrock uses its assets. The measures in this section are sometimes called asset utilization ratios .
Inventory Turnover and Days’ Sales in Inventory
Receivables Turnover and Days’ Sales in Receivables Our inventory measures give some indication of how fast we can sell product.
Asset Turnover Ratios Moving away from specifi c accounts like inventory or receivables, we can consider several “big picture” ratios.
PROFITABILITY MEASURES
Profi t Margin Companies pay a great deal of attention to their profi t margin.
Return on assets (ROA) is a measure of profi t per dollar of assets.
Return on equity (ROE) is a measure of how the stockholders fared during the year.
MARKET VALUE MEASURES
The fi rst of our market value measures, the price–earnings (PE)
ratio
Price–Sales Ratio In some cases, companies will have negative earnings for extended periods, so their PE ratios are not very meaningful.
THE DU PONT IDENTITY
A CLOSER LOOK AT ROE
Popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage.
AN EXPANDED DU PONT ANALYSIS
So far, we’ve seen how the Du Pont equation lets us break down ROE into its basic three components: profit margin, total asset turnover, and financial leverage.
USING FINANCIAL STATEMENTS
WHY EVALUATE FINANCIAL STATEMENTS?
Financial statement analysis is essentially an application of “management by exception.” In many cases, such analysis will boil down to comparing ratios for one business with average or representative ratios.
CHOOSING A BENCHMARK
Time Trend Analysis One standard we could use is history. Suppose we found that the current ratio for a particular fi rm is based on the most recent financial statement information.
Peer Group Analysis The second means of establishing a benchmark is to identify firms similar in the sense that they compete in the same markets, have similar assets, and operate in similar ways.
PROBLEMS WITH FINANCIAL STATEMENT ANALYSIS
In one way or another, the basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks.
GARAY LÓPEZ ANA ERANDI, 2CV8