Finman Reviewer Midterm PDF

FINMAN REVIEWER MIDTERM RATIOS VERTICAL ANALYSIS Liquidity ratios are metrics that help assess a company's ability to meet its short-term What is Vertical Analysis?...

FINMAN REVIEWER MIDTERM RATIOS VERTICAL ANALYSIS Liquidity ratios are metrics that help assess a company's ability to meet its short-term What is Vertical Analysis? obligations. Here are a few key ones: Vertical analysis, also known as common-size Current Ratio analysis, is a method of financial statement Formula: Current Assets / Current analysis where each line item is listed as a Liabilities percentage of a base figure within the same Use: Measures a company’s ability to financial statement. cover its short-term liabilities with its This technique is used to understand the relative short-term assets. proportions of various accounts. Benefit: Helps gauge overall liquidity and potential financial stability. How does it Works? Income Statement: Quick Ratio (Acid-Test Ratio) Each line item is expressed as a percentage of Formula: (Current Assets - Inventory) / total sales or revenue. Current Liabilities For example, if total sales are P 100,000 and the Use: Provides a more stringent measure of cost of goods sold (COGS) is P 40,000, then liquidity by excluding inventory, which COGS would be 40% of total sales. may not be quickly convertible to cash. Benefit: Offers a more accurate picture of Balance Sheet: a company’s ability to meet short term Each line item is expressed as a percentage of obligations without relying on inventory total assets. sales. For example, if total assets are P 500,000 and inventory is P 50,000, then inventory would be Cash Ratio 10% of total assets. Formula: Cash and Cash Equivalents / Current Liabilities Why do Vertical Analysis? Use: Evaluates a company's capacity to Simplifies Comparisons: pay off short term liabilities with its most By converting numbers into percentages, it liquid assets. becomes easier to compare financial statements of Benefit: Offers the most conservative companies of different sizes or to compare view of a company’s liquidity position. different periods for the same company. Operating Cash Flow Ratio Highlights Trends: Formula: Operating Cash Flow / Current It helps in identifying trends over time, such as Liabilities increasing costs or declining profit margins. Use: Assesses how well a company can meet its short term liabilities with cash Benchmarking: generated from its core business Useful for comparing a company's financial operations. performance against industry standards or Benefit: Helps understand the competitors. cash generating ability of the company from its main business activities. Vertical analysis is a powerful tool for financial These ratios are valuable for both investors and analysis, providing insights into the structure and creditors as they provide insight into the financial performance of a company. health and liquidity position of a company. Asset utilization ratios help measure how Benefit: A lower ratio indicates less risk effectively a company uses its assets to generate and better financial health. revenue. Here are some key ones: Total Asset Turnover Ratio Debt Ratio Formula: Net Sales / Average Total Formula: Total Debt / Total Assets Assets Use: Evaluates the proportion of a Use: Evaluates how efficiently a company company's assets that are financed by debt. utilizes its assets to generate sales. Benefit: Provides insight into financial Benefit: Higher ratios indicate better leverage and risk. performance. Interest Coverage Ratio Fixed Asset Turnover Ratio Formula: Earnings Before Interest and Formula: Net Sales / Average Fixed Taxes (EBIT) / Interest Expenses Assets Use: Determines how easily a company Use: Assesses how well a company uses can pay interest on its outstanding debt. its fixed assets (like property, plant, and Benefit: Higher ratios indicate better equipment) to generate sales. ability to meet interest obligations. Benefit: Helps understand the productivity of long-term assets. Debt Service Coverage Ratio Formula: Net Operating Income / Total Inventory Turnover Ratio Debt Service Formula: Cost of Goods Sold / Average Use: Measures a company's ability to Inventory service its debt with its operating income. Use: Measures how quickly inventory is Benefit: Essential for assessing financial sold and replaced over a period. stability and loan repayment capacity. Benefit: Higher ratios indicate efficient These ratios are crucial for understanding a inventory management and sales. company's financial structure and risk profile. Profitability ratios help evaluate a company's Receivables Turnover Ratio ability to generate profit relative to its revenue, as Formula: Net Credit Sales / Average sets, equity, and other factors. Here are some key Accounts Receivable ones: Use: Evaluates how effectively a company collects its receivables. Gross Profit Margin Benefit: Higher ratios indicate efficient Formula: (Gross Profit / Net Sales) * 100 credit and collections management. Use: Measures the percentage of revenue These ratios provide insights into a company’s that exceeds the cost of goods sold. operational efficiency and are useful for both Benefit: Indicates the efficiency of management and investors. production and pricing strategies. Debt utilization ratios assess how well a Operating Profit Margin company manages and uses its debt. Key ones Formula: (Operating Profit / Net Sales) * include: 100 Debt to Equity Ratio Use: Assesses the percentage of revenue Formula: Total Debt / Total Equity left after covering operating expenses. Use: Measures the relative proportion of Benefit: Reflects the operational shareholders' equity and debt used to efficiency of the company. finance a company's assets. Net Profit Margin Formula: (Net Income / Net Sales) * 100 Use: Evaluates the overall profitability after all expenses have been deducted from revenue. Benefit: Provides insight into the company's ability to convert sales into actual profit. Return on Assets (ROA) Formula: Net Income / Average Total Assets Use: Measures how eƯectively a company uses its assets to generate profit. Benefit: Higher ratios indicate more eƯicient asset utilization. Return on Equity (ROE) Formula: Net Income / Average Shareholders' Equity Use: Assesses the profitability relative to shareholders' equity. Benefit: Indicates how well the company is generating returns for its shareholders. These ratios are key for investors and analysts to understand a company's financial health and performance.