Exam 4: Financial Analysis

iClicker: What type of ratio would tell if a company has too much debt? a. leverage b. liquidity c. operational d. valuation

a. leverage

Financial analysis

assessment of the firm's past, present, and future financial conditions

e-Shop, Inc. has net sales on account of $1,500,000. The average net accounts receivable are $610,000. Calculate the days' sales in receivables. a. 2.46 days b. 148.37 days c. 897.90 days d. 365.00 days

b. 148.37 days

Sherical, Inc. provides the following data for the year 2017: .... The cost of goods sold as a percentage of net sales revenue is_____. (round your answer to 2 decimal places)

b. 62.47%

which of the following is not a way to accurately determine the financial performance of a company? a. from year to year b. carefully examining one year's data c. with a competing company d. with the same industry as a whole

b. carefully examining one year's data

Zebra, Inc. costs of goods sold for the year is $2,300,000 and the average merchandise inventory for the year is $139,000. Calculate the inventory turnover ratio of the company. (round your answer to 2 decimal places). a. 93.96 times b. 6.04 times c. 16.55 times d. 8.27 times

c. 16.55 times

the vertical analysis statement of Bateman, Inc. is shown below: Bateman, Inc. Comparative income statement years ended December 31, 2017 and 2016 ... The figure 47% shown for gross profit in 2017 signifies that the gross profit is _________? a. 47% of cost of goods sold b. increased by 47% since the previous year c. 47% of net sales revenue d. equal to 47% of net income

c. 47% of net sales revenue

which of the the following items is a measure of a company's ability to collect receivables? a. current ratio b. account receivable balance c. days' sales in receivable d. inventory turnover rate

c. days' sales in receivables

iClicker: which ratio tells you whether the company is profitable selling its products? a. days sales in inventory b. price/earnings ratio c. gross profit margin d. days sales in receivables e. debt to equity ratio

c. gross profit margin

what the numbers tell you in Days sales in receivables (trend) - questions

can the company collect its' receivables? compare to the company's credit terms

what then numbers tell you in gross profit - questions

can the company make money selling its products?

what the numbers tell you in the current ratio - questions

can the company pay its' current liabilities? -> over 1 is important

what the numbers tell you in days sales in inventory (trend) - questions

can the company sell its' products? compare to industry averages

looking for value in financial analysis

cash - grow company - pay debts - pay dividends stock price increases

The debt to equity ratio of four companies is shown below. Which company has the most favorable ratio? company A: 4:6 company B: 1:6 company C: 2:3 company D: 5:1

company B

vertical analysis

compare % of sales dollars from one year to the next for each line item

use of ratios

compared to: - company's own past -> trends - the industry -> ratios adjust for company size

iClicker: What method could you use to compare financial results from different operating periods? a. vertical analysis b. horizontal analysis c. trend analysis d. all of the above

d. all of the above

t/f: a high current ratio indicates that current liabilities are greater than current assets

false

t/f: days' sales in inventory measures how quickly a company can collect its receivables.

false

what the numbers tell you in the debt to equity ratio - questions

how much of the company is funded by debt? is it too much? -> banks like to see no more than 2-3 times

valuation ratios - questions

is the company a good investment?

what the numbers tell you in EPS (earnings per share) - questions

is the company profitable for the common stockholder?

profitability ratios - questions

is the company profitable?

looking for risk in financial analysis

risk of losing investment?

Why do we do financial analysis?

to make decisions - invest? - lend? - sell? - employment?

t/f: in a vertical analysis of the income statement, each line item is shown as a percentage of net sales

true

which ratios make up operational ratios?

turnover ratios and profitability ratios

what do you look for in financial analysis?

value and risk

trends

- Days sales in receivables - days sales in inventory

understand the competitive advantage - questions

- are there barriers to entry? are switching costs high? are large capital expenditures required? - are there many substitutes for the product?

liquidity ratios - questions

- can the company pay its current liabilities? - does the company have cash available?

leverage ratios - questions

- can the company pay its long term liabilities? - does the company have too much debt?

turnover ratios - questions

- can the company sell inventory and collect receivables?

primary tools for financial analysis

- financial statements - ratios - industry comparisons

understanding the business model - questions

- how does the company make profit? - is there a market for the product?

evaluating companies

- involves understanding the business model - understand the numbers - understand the competitive advantage

understand the numbers - questions

- is the company profitable? - are they financially healthy?

types of ratios

- leverage ratios - liquidity ratios - operational ratios (turnover ratios and profitability ratios) - valuation ratios

limitations of ratio analysis

- no single ratio tells the whole picture - industry average ratios not be desirable targets

other tools to compare financial results from period to period (ex. year to year)

- vertical analysis - horizontal analysis - trend analysis

what the numbers tell you in price/earnings ration - questions

- what are investors willing to pay for $1 of earnings of the company? (quick company valuation) - what is investor confidence that earnings will rise? higher p/e ratio = greater confidence

red flags

1. inconsistent movement in between sales, inventory, and accounts receivables 2. declining sales, gross margin, operating and/or net income 3. too much debt 4. inability to collect receivables 5. build up of inventory

what is the average account receivable collection term? days sales outstanding?

30 days 45 days -> days sales outstanding

industry average days sales in inventory

60 days

company's average days sales in inventory

90 days