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Man Fin Test 2 Ch.3
Terms in this set (25)
What is peer analysis?
Computing ratios for companies and comparing them.
What is trend analysis?
Computing ratios for companies for several periods.
Why do we calculate peer and trend?
To turn data into insight.
How many components are there in a ratio and how many explanations are there behind the ratio changes?
3 explanations. Numerator changes and denominator stays the same, denominator changes but numerator does not, they both change at different rates.
4 things you need to know about ratios?
What aspect of a business are we measuring?
What is the formula?
What is the data?
How do we interpret the data?
Definition of liquidity
Ability to convert an asset into cash quickly and at a fair price. It is also the ability of a company to pay expenses/obligations.
Synonym for leverage?
Debt and borrowing
What does good and bad leverage do for a company?
Amplifies positive returns and losses.
Why do companies buy assets?
Buy assets to generate cash flow.
What 2 fixed cost are affected by leverage?
Interest and depreciation expense.
What is a fixed cost?
Unrelated expense that is unrelated to sales.
Two components of a company's capital structure?
Debt and equity
What are the two ways to assess the ability of a company to meet its obligations?
Compare current assets to current liabilities
Add C/F like EBIT to current assets and compare to current liabilities and obligations.
What is the upside to having high leverage ratio?
The upsides to having a relatively high leverage ratio are the extra profits you can make and the lower equity investment that is needed. This results in a higher ROE.
What is the downside of having a relatively high leverage ratio?
The downside of a higher leverage ratio is the potential for financial distress in the event sales and /or gross profit are declining. Leverage involves fixed costs that can be problematic in a weak environment.
What are two implications of having a higher turnover ratio versus a lower turnover ratio?
The higher the turnover ratio, the more efficient a company is.The more sales or cogs are being generated relative to the investment in the asset. This means a firm that is more efficient can operate with less capital. Be careful not to cut the investment too low. You don't want to run out of inventory or turnaway incremental sales because you are keeping your investment in inventory too low or your A/R terms too tight.
What 3 things affect gross profit margin %?
pricing, sourcing input (COGS), product mix
What 2 things affect operating margin?
S,G,A expenses and depreciation
What is depreciation related to?
What 2 things affect net profit margin?
interest expense and taxes
How do you calculate the $ amount of interest expense?
Interest rate x principal owed
Two components of return on assets?
profitability as measured by NPM%, and efficiency as measured by total asset turnover
What are the three components of ROE?
profitability, efficiency, and leverage as measured by equity turnover ratio
Why is ROE higher than ROA?
What is the difference between ROE and ROIC?
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