Financial ratios

Topics: Balance sheet, Generally Accepted Accounting Principles, Compound interest Pages: 6 (1066 words) Published: July 26, 2014
FINANCIAL STATEMENTS
Accrual-based approach – revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash Cash flow approach – used by financial professionals to focus attention on current and prospective inflows and outflows of cash

1. Balance sheet
a. Assets
Cash and Cash Equivalents
Marketable securities
Accounts receivable
Inventories
Net property, plant and equipment
Intangible assets
b. Liabilities
Accounts payable
Notes payable
Accrued expenses
Deferred taxes – reflects the difference between the taxes and the tax liabilities Long-term debt – debt that matures more than one year in the future

c. Stockholders’ equity
Preferred stock – form of ownership that has preference over common stock when the firm distributes income and assets Common stock – most basic form of corporate ownership
Par value – arbitrary value assigned to common stock on a firm’s balance sheet Paid-in capital in excess of par – number of shares outstanding multiplies by the original selling price of the shares, net of the par value Retained earnings – cumulative total of the earnings that a firm has reinvested since its inception Treasury stock – common shares that were issued and later reacquired by the firm 2. Income statement

Common-size income statement – income statement which all entries are expressed as a percentage of sales Earnings available for common stockholders – net income net of preferred stock dividends Earnings per share (EPS) – earnings available for common stockholders dividend by the number of common stock outstanding

Dividends per share (DPS) – portion of the earnings per share paid to stockholders

3. Statement of Retained Earnings
4. Statement of Cash Flows
5. Notes to Financial Statements

CASH FLOW ANALYSIS
1. Operating flows – cash inflows and outflows directly related to the production and sale of a firm’s products or services 2. Investment flows – cash flows associated with the purchase or sale of fixed assets 3. Financing flows – cash flow that result from debt and equity financing transactions

Free cash flow (FCF) – net amount of cash flow remaining after the firm has met all operating needs

Net operating profits after taxes (NOPAT) – amount of earnings before interests and after taxes

Operating cash flow (OCF) – amount of cash flow generated by a firm from its operations

Noncash charges – expenses that appear in the income statement but do not involve an actual outlay of cash

Inflow and Outflow of Corporate Cash
Inflow
Outflow
Decrease in asset
Increase in asset
Increase in liability
Decrease in liability
Net income
Net loss
Depreciation
Dividends paid
Sae of common or preferred stock
Repurchase or retirement of stock

FINANCIAL RATIOS
1. Liquidity ratios – measures a firm’s ability to satisfy its short-term obligations as they come due

2. Activity ratios – measure of the speed with which a firm converts various accounts into sales

3. Debt ratios – measure of the proportion of total assets financed by a firm’s creditors

Financial leverage – using fixed-cost sources of financing to magnify both the risk and the expected return on a firm’s securities Equity multiplier – measure of the proportion of total assets financed by a firm’s equity

4. Profitability ratios – most closely watched and widely quoted financial ratios

Return on assets – measure of the overall effectiveness of management in generating return to common stockholders with its available assets

Return on equity – measure that captures te return earned on the common stockholders’ investment in a firm

DuPont system - analysis that uses both income statement and balance sheet information to break the ROA and ROE ratios into component pieces

5. Market ratios – relate a firm’s market value, as measured by its current share price, to certain accounting values Price/Earnings...
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