Topic 4 Financial Statement Analysis PDF

Topic 4 Financial Statement Analysis Is the company profitable? Is the company able to meet its short-term and long-term debt obligations? I. Operating Performance: Sales −Costs of Sales Gross Profit Margin = Sales ➢ indicates the percentage of revenue available to cover operating and other expen...

Topic 4 Financial Statement Analysis Is the company profitable? Is the company able to meet its short-term and long-term debt obligations? I. Operating Performance: Sales −Costs of Sales Gross Profit Margin = Sales ➢ indicates the percentage of revenue available to cover operating and other expenditures Operating Income or EBIT Operating Profit Margin= Sales ➢ an operating margin of 15% means that it makes $0.15 (before interest and taxes) for every $ of sales Net Income Net Profit Margin = Sales ➢ shows the % of each $ in revenues that is available to shareholders after paying interest and taxes II. ROE = Net Income Equity (shares) ROA = Net Income + Interest Expense TA ROIC = EBIT (1 − Tc) Equity + Net Debt Profitability    Sales Total Assets  Net Income       ROE =      Sales   Total Assets   Book Value of Equity  III. Ageing of production facilities = Capital Intensity = Asset Turnover = TA Net Fixed Assets Gross Fixed Assets Quick Ratio = (old if <25%) Sales Sales TA IV. Current Ratio = Capital Expenditures CA CL Short-term liquidity (>1) Cash&Cash Eqvts + Short term Invts + Accounts Receivable CL Oper CFs/CL Ratio = CF from Operations Average CL Working Capital measures from Topic 2: 1 𝑊𝐶 𝑟𝑎𝑡𝑖𝑜 = Operating Working Capital Annual Sales Accounts Payable × 365 Annual purchases or COGS or Annual Sales Inventory DIO = × 365 Annual purchases or COGS DPO = DSO = Accounts Receivable × 365 Annual Sales Cash Conversion Cycle (CCC) = Accounts Receivable Days + Inventory Days – Accounts Payable Days IV. Long-term Solvency: Debt Ratios and Interest Coverage ratios Total Liabilities Total Assets ➢ shows the proportion of a company's assets which are financed through debt Total Liabilities L/E Ratio = Total Equity ➢ indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity LT Debt LTDebt/LTCapital Ratio = LT Debt + Total Equity ➢ allows the investors to figure out the total risk of investing in a particular business L/A Ratio = LTDebt/Equity Ratio = LT Debt Total Equity (“Gearing” ratio) Interest Coverage Ratio (EBIT − basis) = Interest Coverage Ratio (CF Basis) = ➢ EBIT(= Net Income + Interest Exp + Income Tax Exp) Interest Expense CF from Operations + Payments for Interest and Income Taxes Cash Payments for Interest Shows the number of times a firm’s income (or CFs) would cover interest expenses (good if >2) 2