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
