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
