Financial Statement Analysis:
Analysis of financial statements is crucial in determining the viability of a company and its
standing/position. Financial statements help companies budget, track income, expenses, how
fast receivables turn, inventory, profit, etc.…
Current Ratio: Current Ratio = Current assets/Current liabilities.
The current ratio indicates the extent to which current liabilities (accounts payable, accrued
wages, taxes) are covered by those assets expected to be converted to cash soon (Current
assets: Cash, accounts receivables, inventory).
Quick Ratio:
Quick ratio (acid test) measures a firm’s ability to payoff short term obligation without relying
on the sale of inventories.
Quick ratio = Current assets- inventories
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Current liabilities
Accounts Receivable Turns Ratio: (Favorite) Helps to understand how quickly
receivables are turned to cash
Account’s receivables are evaluated by days sales outstanding (DSO) ratio. It indicates the
average length of time the firm must wait after making a sale before it receives cash.
Accounts receivable turn ratio (DSO) = accounts receivables
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Avg daily sales
Inventory Turns Ratio:
The inventory turnover ratio shows how many times a particular asset is “turned over” during
the year. The ratio can give insight into whether a firm is holding excess inventory. A low
inventory turnover ratio may also suggest a firm may be holding obsolete goods that are not
worth their stated value.
Inventory turnover ratio = Sales
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Inventories
Working Capital:
It is a measure of a company’s operational efficiency and short-term financial health.
Working capital = Current assets – current liabilities.
Debt to Equity Ratio: A way to see how heavily indebted a company is.
How much do you compared to net worth.
EBITDA:
Earnings before interest, taxes, depreciation, and amortization. The EV/EBITDA ratio looks at
pure cash flow of the business. It is important in helping lenders determine how a company is
generating cash flow. Pure cash flow.
Time Value of Money
N: Number of periods
I/R: Interest rate
PMT: Payment
FV: Future value
Perpetuity: Cashflows that never end.
Calculate Perpetuity:
C ( Cash flow)
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R ( Discount rate /interest rate)
Example:
C = $50,000
------------- = $,100,000
R = 5% (.05)
Capital Budget: Budget for capital assets. Helps to reduce the
company’s tax liability. Also used by auditors to track the
depreciation of capital assets.
Operating Budget: Budget that manages the revenues and expenses
of a business.
*Corporate profits increase if we raise our depreciations.
Real Interest Rate: Interest-inflation.
Nominal Interest Rate: Straight interest rate that you would get on
your bank account.
Depreciation:
Accelerated Depreciation:
Volatility: Turbulence in stocks and market.
Standard Deviation: How far away you are from the mean.
Market Portfolio: Standard and Poor’s 500 index.
Portfolio
Investment Returns Graph: 1926-2014: Riskiest assets, greatest return
(Small cap stocks). Lowest risk asset, least return (U.S Treasury
bonds). S&P (moderate risk, moderate return).
Portfolio Weight: Percentage of portfolio. Example: 1 billion in
portfolio,
200 million in stock, 200 million in bonds, 600 mill cash
20% stock, 20% bonds, 60% cash
Simple Interest: Simple interest is the general interest earned on your principal.
Compound Interest:
compound interest is the principal and the accumulated interest of previous periods.
Compound interest can be thought of interest on interest.
Dollar Cost Averaging: Keep investing/reinvesting dividends, capital
gains, matches from employer. Allows you to go into investing in a
longer period of time at an overall average lower price.
Warrant: A warrant is an option to purchase stock at a certain price.
Road Show: When bankers promote stocks or bonds to investors.
Due Diligence: When investment bankers do their market research when underwriting
stocks or bonds.
The Post: Watched in class to illustrate what investment bankers do.
Bond Price Inverse to Yield: If bond prices fall, yields increase. Vice
versa.
Reasons for Long Term Interest Rates to Rise: Inflation or a budget deficit may
cause long term interest rates to rise.
Reasons for Long Term Interest Rates to Fall: Stock market crash.
Mitt Romney and Debtor in Possession Financing: Debate with Obama
over GM bankruptcy. Did not want to give debtor in possession from
the government. Wanted GM to go bankrupt.
Trade Credit: company may offer discount if you pay before 30 days.
To get paid faster.
Factoring: A firm can “factor” or sale it’s receivables to increase its cash flow.
Accounts Receivable Aging: Helps track the age of receivables. 1-30
days 30-60 days, 60-90 days.
Junk Bonds: High yield debt
Liberator of Companies: Watched a scene from Wall Street. Main
character refers to himself as a liberator of companies by issuing
high yield debt (junk bonds) to purchase companies and break them
up, make a large profit, reward the shareholders, and pay back the
debt.
