Investment Analysis Chapter 19

statement of cash flows

a financial statement showing a firm's cash receipts and cash payments during a specified period

income statement

a financial statement showing a firm's revenues and expenses during a specific period

return on assets (ROA)

a profitability ratio; earnings before interest and taxes divided by total assets

current ratio

a ratio representing the ability of the firm to pay off its current liabilities by liquidating current assets (current assets/current liabilities)

international financial reporting standards

accounting standards used in many non-U.S. markets that rely more on principles and less on rules than U.S. standards

return on equity (ROE)

an accounting ratio of net profits divided by equity

balance sheet

an accounting statement of a firm's financial position at a specified time

inventory turnover ratio

cost of goods sold as a multiple of average inventory

DuPont system

decomposition of a firm's profitability measures into the underlying factors that determine such profitability

accounting earnings

earnings of a firm as reported on its income statement

FIFO

first-in first-out accounting method of valuing inventories

LIFO

last-in first-out accounting method of valuing inventories

liquidity

liquidity refers to the speed and ease with which an asset can be converted to cash

interest coverage ratio

measure of financial leverage; earnings before interest and taxes as a multiple of interest expense

cash ratio

measure of liquidity of a firm; ratio of cash and marketable securities to current liabilities

quick ratio/acid test ratio

measure of liquidity similar to the current ratio except for exclusion of inventories

leverage ratio

ratio of debt to total capitalization of a firm

market-book-value ratio

ratio of price per share to book value per share

times interest earned

ratio of profits to interest expense

total asset turnover

the annual sales generated by each dollar of assets (sales/assets)

price-earnings (P/E) ratio

the ratio of a stock's price to its earnings per share

average collection period

the ratio of accounts receivables to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales x 365)

return on sales/profit margin

the ratio of operating profits per dollar of sales (EBIT divided by sales)

economic earnings

the real flow of cash that a firm could pay out forever in the absence of any change in the firm's productive capacity

quality of earnings

the realism and conservatism of the earnings number and the extent to which we might expect the reported level of earnings to be sustained

fair value accounting (market-to-market accounting)

use of current values rather than historic cost in the firm's financial statements

economic value added (AKA residual income)

The spread between ROA and cost of capital multiplied by the capital invested in the firm. It measures the dollar value of the firm's return in excess of its opportunity cost.