Cheatography
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Links Between Financial Statements
Liquidity RatiosCurrent Ratio = Current Assets / Current Liabilities
Ability of the firm to cover its short term debts
Quick Ratio = Cash + cash equiv + receivables / Curent Liabilities
Ability of the firm to cover its immediate short term debts
Cash Ratio = Cash + Cash Equivalents / Curent Liabilities
Measures cash available to pay short term debts
Working capital :
Margin of safety to pay current obligations
Current assets – current liabilities |
FCFFree Cash Flow for a project or a firm:
= Earnings Before Interest and Taxes (EBIT)
x (1- tax rate)
+ Depreciation
- Changes in working capital (without cash)
- Replacement Investments (Capex)
(+ Receipt from asset sale)
(Note: you can also get free cash flows from operating cash flows + investing cash flows – interest (1-tax%) and adjustment for dividends). |
Solvency RatiosTimes Interest Earned = Net Income + Interest Exp. +Tax Exp. / Interest Exp.
Shows the firm’s ability to pay the cost of financing
Debt-to-Equity Ratio = Total Liabilities / Shareholder's Equity
Proportion of debt for each “dollar” invested by shareholders |
| | Income StatementProfit Margin = | Net Income / Sales Revenue | % of each “dollar” of sales that remains as net income. | Quality of Income = | Cash Flow from Operating Activities / Net Income | Compares the cash flows earned (real) to net income declared (accounting principles!) | Fixed Assets Turnover = | Net Sales Revenue / Average Net Fixed Assets | Shows the ability of the firm to use its fixed assets to generate revenue. | Return on Equity = | Net Income / Average Shareholders’ Equity | How much income was earned for every “dollar” invested by owners? |
| | Structure of Income Statement
Return on Asset RatiosProfit Margin = EBIT x (1-tax) / Net Sales
Asset Turnover = Net Sales / Average Assets
ROA
= Profit margin x Asset turnover
= EBIT x (1-tax) / Average Assets
ROCE (return on capital employed) = EBIT x (1 – tax) / Capital Employed
Capital employed
= Total assets – short term liabilities OR
= Long term liabilities + Equity
Financial leverage: ROE – ROA
Shows the relationship between the return on assets (all forms of funding) and the return on equity (only shareholder’s investment).
Should be positive (indicates that the company creates a bigger return than the cost of borrowing).
When return on capital employed is more than the expected return on investment => Value Creation |
Investor RatiosEPS = Net Income* /Average Number of Shares Outstanding For The Period
Measures return on investment for shareholders.
*If there are preferred dividends, the amount is subtracted from net income.
Price-to-earnings ratio = Current Market Price Per Share / Earnings Per Share
Measures the relationship between the current share price and the earnings per share. Indicates market expectations. |
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