Sources of Cash
A firm's activities that generate cash.
Uses of Cash
A firm's activities in which cash is spent. (Also called "applications of cash".)
Statement of Cash Flows
A firm's financial statement that summaries its sources and uses of cash over a specified period.
A standardized financial statement presenting all items in percentage terms. (Balance sheet items are shown as a percentage of assets and income items as a percentage of sales.)
Common-Base Year Statement
A standardized financial statement presenting all items relative to a certain base year amount.
Relationships determined from a firm's financial information and used for comparison purposes.
Current assets/ Current liabilities
(Current assets - Inventory)/ Current Liabilities
Cash / Current Liabilities
Net Working Capital to Total Assets
Net Working Capital / Total Assets
Current assets / Average daily operating costs
Total Debt Ratio
(Total Assets -Total Equity)/ Total Assets
Total Debt / Total Equity
Total Assets / Total Equity
Long-term Debt Ratio
Long-term Debt / (Long-term Debt + Total Equity)
Times Interest Earned Ratio
EBIT / Interest
Cash Coverage Ratio
(EBIT + Depreciation)/ Interest
Inventory Turnover Ratio
Cost of Goods Sold / Inventory
Days' Sales in Inventory
365 Days / Inventory Ratio
Receivable Turnover Ratio
Sales / Accounts Receivable
Day's Sales in Receivables
365 Days / Receivables Turnover
NWC Turnover Ratio
Sales / NWC
Fixed Asset Turnover Ratio
Sales / Net Fixed Assets
Total Asset Turnover Ratio
Sales / Total Assets
Net Income / Sales
Returns on Assets (ROA)
Net Income / Total Assets
Return on Equity (ROE)
Net Income / Total Equity
Earnings Per Share (EPS)
Net Income / Shares Outstanding
Price-Earnings Ratio (PE)
Price Per Share / Earnings Per Share
Price-Sales Ratio (PSR)
Price Per Share / Sales Per Share
Market to Book Ratio
Market Value Per Share / Book Value Per Share
Du Pont Identity
Popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage.
Standard Industrial Classification Code (SIC)
A U.S. government code used to classify a firm by its type of business operations.
2 Main Functions of a Firm
(1.) Generate cash (2.)Spend cash
Cash Flow from Assets =
cash flow to creditors + cash flow to owners
5 Categories of Financial Ratios
(1.)Short-term solvency/liquidity ratios
(2.)Long-term solvency/liquidity ratios
(3.)Asset management/turnover ratios
(5.)Market value ratios
Another name for liquidity ratios
Goal of a Liquidity Ratio
To analyze a firm's ability to pay its bills over the short run without undue stress.
The rate at which cash is burned in the race to become profitable.
Another name for long-term solvency ratios...
financial leverage ratios
Another name for the Times Interest Earned Ratio...
interest coverage ratio
Meaning of EBITD
Earnings before interest, taxes, and depreciation.
Meaning of EBITDA
Earnings before interest, taxes, depreciation, and amortization.
A non-cash deduction conceptually similar to depreciation, expect that it applies to intangible assets.
Asset Utilization Ratios
Analyze the efficiency with which a company uses its assets.
The higher the inventory turnover ratio is...
the more efficiently we are managing our inventory.
Another name for Days' Sales in Receivables...
average collection period (ACP)
Definition of Return on Assets (ROA)
A measure of profit per dollar of assets.
Definition of Return on Equity (ROE)
A measure of how the stockholders fared during the year.
Another name for Return on Equity...
Return on net worth.
PE ratios measure...
how much investors are willing to pay per dollar of current earnings.
Tobin's Q Ratio =
Market value of firm's assets / replacement costs of firm's assets.
Another Equation for ROE =
ROA X EM (=ROA x (1 + Debt-equity ratio))
Sales Equation for ROE =
Profit margin x Total asset turnover ratio x Equity multiplier
3 Things That Affect ROE
(1.)Operating efficiency (2.)Asset use efficiency (3.)Financial leverage
Internal Uses of Financial Statements
(1.)performance evaluation (2.)planning for the future
External Uses of Financial Statements
(1.)evaluate suppliers (2.)future existence of the company (3.)assessing the firm's creditworthiness (4.)competing efficiently against other firms.
the group of companies our company aspires to be like.
Basic Problem With Financial Statements Analysis...
there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks.