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Financial Statement Analysis, Leverage Ratio, Pitfalls of Financial…
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Financial Statement
- Income Statement / Profit & Loss statement
With this method of analysis of financial statements, we will look up and down the income statement (hence, “vertical” analysis) to see how every line item compares to revenue, as a percentage.
Now it’s time to look at a different way to evaluate the income statement. With horizontal analysis, we look across the income statement at the year-over-year (YoY) change in each line item.
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The balance sheet metrics can be divided into several categories, including liquidity, leverage, and operational efficiency.
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The cash flow statement will help us understand the inflows and outflows of cash over the time period we’re looking at.
Operating Activities include:
- Cash Collection
- Cash paid for inventory
- Cash paid for wages, rent, advertising
Investing Activities include:
- Investing in the business's productive capacity
- Buying new buildings, land, or machines
Financing activities include:
- Borrowing money
- Repaying loans
- Cash from investors
- Paying dividends
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Common-Size Statements
Convert a company's raw financial statement numbers into percentage of total sales or percentage of total assets
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Current Assets (Cash, AR, etc)
/ Current Liabilities (AP, etc)