Financial Statements and Financial Ratios
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| What is "R"? | The % return that a company needs to provide their security holders to satisfy them
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| Rrisky = what? | Rrisky= nominal risk free rate + risk premium
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| What is risk premium? | Additional return investors want for investing in riskier security.
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| Net Present Value | NPV = PV of benefits - PV of costs
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| Average Tax Rate | Tax Liability/Taxable Income
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| Corporate Tax Income | Or average tax rate is the % of each dollar of taxable income that the firm pays in taxes.
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| Marginal Tax Rate | The amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.
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| Interest is taxable with two exceptions, what are they? | State/local government bonds and one corporation owning stock in another where 70% are tax exempt.
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| Taxes and interest/dividends paid by corporation | Interest payments deducted from income before calculating taxable income. Dividends paid to shareholders not tax deductible.
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| What is free cash flow? | The cash available for distribution to the investors after investments for firms necessary, ongoing operations.
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| What is the free cash flow equation? | FCF=[EBIT(1-tax rate)+Depreciation]-[Change in gross fixed assets + change in net operating working capital] OR (Operating cash flow - Investment in operating capital)
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| Positive FCF | Funds available for distribution to investors
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| Negative FCF | May be experiencing operating or managerial problems, may be investing heavily in operating capital to support growth.
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| What are ratios used for? | Trend analysis and competitor analysis.
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| What is trend analysis? | A time series method; comparison to the same firm over time.
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| What is competitor analysis? | A cross sectional method; comparison to other firms in the same industry.
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| P/E Ratio | Trailing P/E = trailing twelve years and Forward P/E = five years extended.
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| Liquidity Ratios | Relationship between firm's liquid assets.
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| Current Ratio | Current Assets/Current Liabilities
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| Quick Ratio or Acid-Test Ratio | Current Assets - Inventory/Current Liabilities
Measures ability to pay short-term obligations without inventory sales.
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| Cash Ratio | Cash and marketable securities/Current Liabilities
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| Asset management ratios | Measure efficiency of firms asset use
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| Inventory Turnover | Sales or COGS/Inventory
Dollar of sales produced per dollar of inventory. Often uses COGS instead of sales because of way it's listed on the balance sheet
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| Average Collection Period | Accounts receivable X 365 days/Credit sales OR accounts receivable/(Sales/365)
Measures number of days accounts receivable held until collected.
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| Fixed Asset Turnover | Sales/Fixed Assets
Measures dollars of sales produced per dollar of fixed assets.
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| Total Asset Turnover | Sales/Total Assets
How well management is using its assets to generate sales. Measures dollars of sales produced per dollar of total assets.
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| Debt Management Ratios | Mesure how much debt (financial leverage) versus equity a firm uses to finance assets .
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| Debt Ratio | Total Debt/Total Assets
Measures % of total assets financed with debt. How many dollars of debt for each dollar of equity.
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| Long-Term Debt Ratio | Long-term debt/total assets
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| Debt-to-equity ratio | Total Debt/Total Equity
Measures dollars of debt financed for every dollar of equity financed.
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| Equity multiplier ratio | Total Assets/Total Equity
Measures the dollars of assets on balance sheet for every dollar of equity financed.
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| Times interest earned ratio | EBIT/Interest
Measures operating earnings dollars available to meet interest obligations.
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| Net Profit Margin | Net Income available to common stockholders/Sales
% of sales left after all firm expenses are paid. How many dollars of NI are generated through sales.
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| Return on Assets | Net Income available to common stockholders/Total Assets
Measures overall return on firms assets inclusive of leverage and taxes.
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| Return on Equity | Net Income available to common stockholders/Common stockholder's Equity
Measures return on common stockholder's investments. Affected by NI and amount of financial leverage.
High ROE = good unless driven by excessively high leverage
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| Dividend payout ratio | Common stock dividends/Net Income available to common stockholders
Measures fraction of earnings paid out to common stockholders as dividend.
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| Retention Ratio | 1-POR
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| Market Value Ratios | Market prices of publicly traded firms incorporate risk. Ratios that include stock market values are important. Market values reflect what investors think of the company's future performance and risk.
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| P/E Ratio | Market Price per Share/Earnings per Share
P0/E0=P0 * Shares/NI = P0 * # shares/EPS * #shares
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| To find price based on the industry. | (Average P/E)*Earnings = Price OR (industry P/EBIT)*EBIT
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| Price-to-book or market-to-book ratio | Measures price investors will pay per $1 of book value. High P/B means high expected growth. Also drives stock classification as growth or value.
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| Dividend Yield | Expected dividend per share/ price per share OR DIV1/P0
How many dollars of income do you get from how many dollars or stock. Measure of % return of dividends for the upcoming year.
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| Pay-out-ratio | Gross Dividends Common Stock/NI
Proportion of earnings that company pays out as dividends
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| Dupont Model | ROA = NI/TA = NI/S X S/TA
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Created by:
efgreenberg
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