Common-size statement standardized financial statement presenting all items in percentage terms.

Balance sheet items are shown as a

percentage of assets and income statement items as a percentage of sales.
Common-base year statement standardized financial statement presenting all items relative to a certain base year amount.
Financial ratios relationships determined from a firms financial information and used for comparison purposes.
DuPont identity popular expression breaking ROE into three parts: operating efficiency, asset use efficiency, and financial leverage.
Standard Industrial Classification (SIC) code A U.S. government code used to classify a firm by its type of business operations.
Ratios: Allow for better comparison through time or between companies.
Categories of Financial Ratios:

Short-term solvency or liquidity ratios - Red

Long-term solvency or financial leverage ratios - Yellow

Asset management or turnover ratios

Profitability ratios - Green

Market value ratios - Blue

Current Ratio = CA/CL

Days Sales in Receivables = 365/Receivables Turnover

Quick Ratio = (CA Inventory)/CL

Total Asset Turnover = Sales/Total Assets

Cash Ratio = Cash/CL

NWC Turnover = Sales/NWC

NWC to Total Assets = NWC/TA

Fixed Asset Turnover = Sales/NFA

Total Debt Ratio = (TA TE)/TA

Profit Margin = Net Income/Sales

Debt/Equity = TD/TE

Return on Assets (ROA) = Net Income/Total Assets

Equity Multiplier = TA/TE = 1 + D/E

Return on Equity (ROE) = Net Income/Total Equity

Long-term debt ratio = LTD/(LTD + TE)

DuPont ROE = ROA * Equity Multiplier

Times Interest Earned = EBIT/Interest

DuPont ROE = Profit Margin * Total Asset Turnover * Equity

Multiplier

Cash Coverage = (EBIT + Depreciation)/Interest

PE Ratio = Price per share/Earnings Per Share

EBIT = Rev COGS Dep or EBT + Int

Market-to-book ratio = market value per share/book value per

share

Inventory Turnover = Cost of Goods Sold/Iventory

Market Value Added = MV of equity Equity capital supplied by

shareholders = (Shares outastanding)(stock price) Total
common equity

Days Sales in Inventory = 365/Inventory Turnover

EVA = EBIT(1 T) (Total Capital)(After-tax cost of capital)

Receivable Turnover = Sales/Accounts Receivable

Profit margin is a measure of the firms operating efficiency how well it controls costs
Total asset turnover is a measure of the firms asset use efficiency how well does it manage its assets
Equity multiplier is a measure of the firms financial leverage
Unlike MVA focuses on managerial effectiveness in a given year, EVA is an estimate of a businesss true economic profit for the year.
Ratios are not very helpful by themselves; they need to be compared to something
Time-Trend Analysis

Used to see how the firms performance is changing through time

Internal and external uses

Peer Group Analysis

Compare to similar companies or within industries

SIC and NAICS codes

Potential Problems

There is no underlying theory, so there is no way to know which ratios are most relevant

Benchmarking is difficult for diversified firms

Globalization and international competition makes comparison more difficult because of differences in accounting regulations

Different fiscal years

Extraordinary events
FV = PV(1 + r)t
PV = FV / (1 + r)t
When we talk about discounting, we mean finding the present value of some future amount.
When we talk about the value of something, we are talking about the present value unless we specifically indicate that we want the future
value.
r = (FV / PV)1/t 1
t = ln(FV / PV) / ln(1 + r)
The rule of 72

A quick way to estimate how long it will take to double your money. # years to double = 72 / r where r is a percent.