Module 11: Financial Statement Analysis

equity multiplier

1/1- debt ratio

Accounts receivable turnovermeasures how effective a company's _____ policies are. Inventory turnover illustrates how well a company manages its _____ levels. _____ turnover ratios are generally preferred.

Accounts receivable turnovermeasures how effective a company's credit policies are. Inventory turnover illustrates how well a company manages its inventory levels. Higher turnover ratios are generally preferred.

Both _____ and ______ users of accounting information perform financial statement analysis to produce useful information for decision making.

Both internal and external users of accounting information perform financial statement analysis to produce useful information for decision making.

times interest earned ratio

EBIT/int exp

Market value ratios relate to a firm's market value, as measured by its current share price, to certain accounting values. Two common market value ratios are the ____ ____ ratio and the ____ __ ___ ratio.

Market value ratios relate to a firm's market value, as measured by its current share price, to certain accounting values. Two common market value ratios are the price-earnings (PE) ratio and the market-to-book ratio.

Ratio analysis has its limitations. The results of a ratio analysis are no better than the ____ of the financial statements. Accounting practices can ____ widely among firms, especially domestic versus foreign companies. Some firms engage in business activities that span ____ _____, so picking an appropriate benchmark can be difficult. An industry average is not necessarily a ____ target. _____ changes in operations from one period to the next can make comparisons across time ineffective. Financial ratios are simply ____ that can suggest the need for further investigation.

Ratio analysis has its limitations. The results of a ratio analysis are no better than the quality of the financial statements. Accounting practices can differ widely among firms, especially domestic versus foreign companies. Some firms engage in business activities that span multiple industries, so picking an appropriate benchmark can be difficult. An industry average is not necessarily a desirable target. Seasonal changes in operations from one period to the next can make comparisons across time ineffective. Financial ratios are simply clues that can suggest the need for further investigation.

dupont identity

RoE= net profit margin x TAT x EM RoE= net income/sales x sales/total assets x 1/1-debt ratio

trend analysis

involved the collection of information from past time periods and plotting te information on a trend line for further analysis

market to book ratio

market price per share/book value per share

___ ___ evaluates a firm's financial information over a period of time. Periods may be measured in months, quarters, or years, depending on the circumstances. The goal is to calculate and analyze the amount and percent ____ of financial statement information from one period to the next.

Trend analysis evaluates a firm's financial information over a period of time. Periods may be measured in months, quarters, or years, depending on the circumstances. The goal is to calculate and analyze the amount and percent change of financial statement information from one period to the next.

debt ratio

a capital structure ratio that indicates the percentage of a company's assets that were financed with debt

debt to equity ratio

a capital structure ratio that measures how many dollars of debt are used per dollar of equity to finance the firm's assets. It is an important measure of the firm's leverage

times interest earned ratio

a capital structure ratio that measures the ability of a firm to pay its interest expense

common size financial statements

a company financial statement that displays all items as percentages of common base figure

asset management efficiency

a company's ability to generate sales from he assets it has acquired

book value

a company's book value is its net assets. In other words, net assets= total assets-total liabilities, or not assets= common SHE

unlevered

a firm that is financed entirely with capital provided by the owners, thus it has no long term debt

quick ratio or acid-test ratio

a liquidity ratio that measures a company's ability to meets short term obligations with its most liquid assets-- generally cash and accounts receivable

current ratio

a liquidity ratio that measures whether or not he firm has enough current resources to pay its short term obligations. The current rail compares current assets to current liabilities

market to book ratio

a market value ratio that measures the value of a company by comparing the book value of a firm to its market value

price earnings ratio

a market value ratio used to compare a company's current share price to its per share earnings

DuPont identity

a method of assessing a company's return on equity ratio by breaking it down into three parts: net profit margin, total asset turnover, and an equity multiplier that reflects the use of debt financing

operating profit margin

a profitability ratio that measures how much of every dollar of revenue is left over after accounting for COGS and operating expenses

net profit margin

a profitability ratio that measures how much out of every dollar of sales a company actually keeps in earnings

gross profit margin

a profitability ratio that measures hoy much of every dollar of revenue is left over after accounting for the cost of goods sold

return on equity (RoE)

a profitability ratio that measures the rate of return on the common stockholder's investment

operating return on assets

a profitability ration that measures how effective a company is at controlling operating expenses and how efficient it is at using its assets to generate revenue

A common profitability ratio that measures profits with respect to ____ is operating return on assets.

A common profitability ratio that measures profits with respect to assets is operating return on assets.

Total asset turnoveris a catch-all efficiency ratio that highlights how effective management is at using both ___-___ and ___-___ assets.

Total asset turnoveris a catch-all efficiency ratio that highlights how effective management is at using both short-term and long-term assets.

equity multiplier

captures the effect of the firm's use of debt financing to magnify its return on equity (RoE)

book value per share

common equity divided by the number of outstanding shares of common stock

quick ratio

current assets-inventory/current liabilities

current ratio

current assets/current liabilities

Liquidity ratios

current, quick, accounts receivable, inventory turnover

price earnings ratio

market price per share/earnings per share

return on equity

net income/common equity

net profit margin

net income/sales

operating profit margin

net operating income/sales

operating return on assets

operating income/sales x sales/total assets = operating income/total assets cost control x asset utilization efficiency

return invested capital ratios

operating return on assets, return on equity, dupont identity

market value ratios

price earnings ratio, market to book ratio

gross profit margin

sales-COGS/sales gross profits/sales

FAT

sales/net plant and equipment

TAT

sales/total assets

liquidity

the amount of capital that is available to meet immediate and short term obligations. A measure of how well a firm can service its debts using its own assets

profitability

the capacity to make a profit; the income earned after deducting all costs and expenses related to generating revenue

market value or market price

the estimated price that a buyer would pay and a seller would accept in an open and competitive market

leverage

the extent to which debt is used to finance a firm's assets

capital structure

the mixture of debt and equity a firm uses to finance its assets

debt ratio

total L/total A

debt to equity ratio

total LT debt/total SHE

profitability ratios

gross profit margin, operating profit margin, net profit margin

Another commonly reported capital structure ratio is the ___-__-____ ratio. It measures how many dollars of debt a firm has for each dollar of equity. Both the debt ratio and the debt-to-equity ratio gauge a firm's use of _____. Unlevered firms have ratios of ____, but as the firm substitutes debt financing for equity the ratios will _____.

Another commonly reported capital structure ratio is the debt-to-equity ratio. It measures how man dollars of debt a firm has for each dollar of equity. Both the debt ratio and the debt-to-equity ratio gauge a firm's use of leverage. Unlevered firms have ratios of zero, but as the firm substitutes debt financing for equity the ratios will increase.

Asset ______ ____/_____ ratios, or turnover ratios, measure how effectively a company utilizes its assets to generate revenue. Common efficiency ratios include ___ ___ ____, ____ ____ ____, ____ ____ ___, and ____ ____.

Asset management utilization/efficiency ratios, or turnover ratios, measure how effectively a company utilizes its assets to generate revenue. Common efficiency ratios include total asset turnover, fixed asset turnover, accounts receivable turnover, and inventory turnover.

inv turnover

COGS/inv

Capital structure ratios evaluate a company's ability to meet its ___-___ debt obligations. The debt ratio measures the _____ of total assets financed by the firm's creditors. A company generally is perceived to be less risky the _____ the debt ratio, however, too low a debt ratio may result in unnecessarily ____ risk and return.

Capital structure ratios evaluate a company's ability to meet its long-term debt obligations. The debt ratio measures the proportion of total assets financed by the firm's creditors. A company generally is perceived to be less risky the lower the debt ratio, however, too low a debt ratio may result in unnecessarily low risk and return.

Common size financial statements are simply financial statements that have been converted to a ______ measure. Income statement items are expressed as a percentage of _____, whereas balance sheet items are expressed as a percentage of total ______. By standardizing financial statement information in the income statement and balance sheet users of accounting information can easily _______ one firm's statements over time and to comparable firms.

Common size financial statements are simply financial statements that have been converted to a percent measure. Income statement items are expressed as a percentage of revenue, whereas balance sheet items are expressed as a percentage of total assets. By standardizing financial statement information in the income statement and balance sheet users of accounting information can easily compare one firm's statements over time and to comparable firms.

Financial _____ are the principal tool of financial statement analysis. They standardize the financial information so that comparisons can be made across firms of varying sizes. Ratio analysis can be used to answer questions on a firm's _____, _____ _____, ____ _____ ____, ____, and ____ ____. Users of financial information rely on ratio analysis to examine a firm's performance across time and compare a firm's performance with that of its industry peers.

Financial ratios are the principal tool of financial statement analysis. They standardize the financial information so that comparisons can be made across firms of varying sizes. Ratio analysis can be used to answer questions on a firm's liquidity, capital structure, asset management efficiency, profitability, and market value. Users of financial information rely on ratio analysis to examine a firm's performance across time and compare a firm's performance with that of its industry peers.

___ ____ turnover measures a firm's ability to generate revenue from fixed-asset investments - specifically property, plant, and equipment (PP&E), net of depreciation.

Fixed asset turnover measures a firm's ability to generate revenue from fixed-asset investments - specifically property, plant, and equipment (PP&E), net of depreciation.

Liquidity refers to the ability of a firm to meet its ___ -____ obligations - the ease with which it can pay its bills. Because a common precursor to financial distress and bankruptcy is low or declining _____, these ratios are viewed as good leading indicators of cash flow problems. A firm's overall ______ can be evaluated using the two most common liquidity ratios: the ____ ratio and the ____ ratio. _____ liquidity ratios are generally preferred.

Liquidity refers to the ability of a firm to meet its short-term obligations - the ease with which it can pay its bills. Because a common precursor to financial distress and bankruptcy is low or declining liquidity, these ratios are viewed as good leading indicators of cash flow problems. A firm's overall liquidity can be evaluated using the two most common liquidity ratios: the current ratioand the quick ratio. Higher liquidity ratios are generally preferred.

Profitability ratios measure a company's ____ with respect to a given level of ____, a certain level of ____, or the owners' investment. Profitability ratios that measure profits with respect to sales include ___ profit margin, ____ profit margin, and ___ profit margin.

Profitability ratios measure a company's profits with respect to a given level of sales, a certain level of assets, or the owners' investment. Profitability ratios that measure profits with respect to sales include gross profit margin, operating profit margin, and net profit margin.

____ __ ____ and the ____ ____ measures profits with respect to stockholders' equity. The DuPont Identity breaks down the return on equity ratio into its components - ___ ____ _____, ____ _____ _____, and an ___ ___ that uses the debt ratio - so that each one can be examined in depth.

Return on equity and the DuPont Identity measures profits with respect to stockholders' equity. The DuPont Identity breaks down the return on equity ratio into its components - net profit margin, total asset turnover, and an equity multiplier that uses the debt ratio - so that each one can be examined in depth.

asset management utilization/efficiency ratios

TAT, FAT

The ___ ____ ratio uses accounting values from the income statement - earnings, or net income, per share. It measures the amount that investors are willing to pay for each dollar of a firm's earnings.

The PE ratio uses accounting values from the income statement - earnings, or net income, per share. It measures the amount that investors are willing to pay for each dollar of a firm's earnings.

The ___ __ ____ ratio uses accounting values from the balance sheet - book value, or common stockholders' equity, per share. It provides an assessment of how investors view a firm's performance. The stocks of firms that are expected to perform well typically sell at ____ market-to-book ratios than the stocks of firms with less attractive outlooks.

The market-to-book ratio uses accounting values from the balance sheet - book value, or common stockholders' equity, per share. It provides an assessment of how investors view a firm's performance. The stocks of firms that are expected to perform well typically sell at higher market-to-book ratios than the stocks of firms with less attractive outlooks.

The objective of financial statement analysisis to use the information provided in the financial statements to produce ______ data to support the decisions of managers, investors, and creditors. The tools of financial statement analysis include using ____ ___ financial statements and financial ____ to evaluate a company's performance.

The objective of financial statement analysisis to use the information provided in the financial statements to produce quantified data to support the decisions of managers, investors, and creditors. The tools of financial statement analysis include using common size financial statements and financial ratios to evaluate a company's performance.

The ___ ___ ____ ratio measures a firm's ability to make interest payments on its long-term debt. A ____ times interest earned ratio is generally preferred.

The times interest earned ratio measures a firm's ability to make interest payments on its long-term debt. A higher times interest earned ratio is generally preferred.

fixed asset turnover rate

an asset management efficiency ratio that measures how effectively a company is using its fixed assets to generate revenue

inventory turnover ratio

an asset management efficiency ratio that measures the number of times inventory is sold/replaced in a given time period-- this is known as the inventory cyle

accounts receivable turnover ratio

an asset management efficiency ratio that measures the number of times that accounts receivable are rolled over each period

acc rec turnover

annual credit sales/acc rec

total asset turnover ratio

asa asset management efficiency ratio that measures how efficient a firm is using its assets to generate sales

capital structure ratios

debt to equity, debt, equity multiplier, times interest earned