Financial Statement Analysis

Average collection Period

365/(AR Turnover)

Average sale period

365/(inventory Turnover)

Common Size Financial Statements

A vertical analysis in which each financial statement item is expressed as a percentage In balance sheets, usually expressed as % of total assets In income statements, usually expressed as % of sales

Operating Cycle

Average collection Period + Average Sale Period Measures elapsed time from when inventory is received from suppliers to when cash is received from customers

Inventory Turnover

COGS/(average inventory)

Times Interest Earned

EBIT/interest expense Measures ability to provide protection to long term creditors Less than 1.0 is inadequate

Vertical Analysis

Focuses on the relationships among financial statements at a given point in time

Dupont formula

RoE = (Net profit margin) X (Total asset turnover) X (Equity Multiplier)

Total Asset Turnover

Sales/(average total assets) Measures how efficiently assets are being used to generate sales

Financial Leverage

results from the difference between the rate of return the company earns on investments in its own assets and the rate of return that the company must pay its creditors

Horizontal Analysis (trend analysis)

shows the changes between years in the financial data in both dollar and percentage form Quantifying dollar changes overtime highlights changes that are most important economically Quantifying percentage changes over time highlights changes that are the most unusual

Working capital

the excess of current assets over current liabilities not free. must be financed with LT debt and equity

Equity Multiplier

(Average Total Assets)/(Average SE) Indicates portion of assets funded by equity

Book Value Per Share

(Common SE)/(number of common shares outstanding)

Dividend Payout Ratio

(Dividends per share)/(earnings per share)

Dividend Yield Ratio

(Dividends per share)/(market price per share)

Return on Total Assets

(Net Income + (interest expense(1-tax rate)))/Average Total Assets

Return on Common Stockholders Equity

(Net Income - Preferred Dividends)/(average common SE)

Return on Equity

(Net Income)/(Average SE)

Free Cash Flow

(Net cash provided by operating activities) - (Capital expenditures) - (dividends)

Current Cash Debt Coverage Ratio

(Net cash provided by operating activities)/(Average current liabilities)

Cash Debt Coverage Ratio

(Net cash provided by operating activities)/(Average total liabilities)

Acid test ratio (Quick Ratio)

(Quick assets)/(current liabilities) quick assets are cash, AR, marketable securities, current notes receivable

Current Ratio

(current Assets)/(current liabilities) measures a company's short term debt paying ability

Gross Margin Percentage

(gross margin)/sales

Price-earnings ratio

(market price per share)/(earnings per share)

Earnings per share

(net income)/(average # of common shares outstanding)

Net Profit Margin Percentage

(net income)/sales

Negative financial leverage

(return on investment in assets) < (fixed rate of return on borrowed funds)

Positive Financial Leverage

(return on investment in assets) > (fixed rate of return on borrowed funds)

Accounts Receivables Turnover Ratio

(sales on account)/(average AR)

Debt to Equity Ratio

(total liabilities)/SE