Activity ratio

financial ratios that indicate how well a corporation is managing its operations

Inventory turnover, Days of inventory, Net working capital turnover, asset turnover, fixed asset turnover, average collection period, accounts receivable turnover, accounts payable period, and days of cash.

Altman’s Z-Value bankruptcy formula

Formula used to estimate how close a company is to declaring bankruptcy

Z= 1.2×1 +1.4×2+3.3×3+0.6×4+1.0×5

x1 = working capital/total assets

x2 = retained earnings/total assets

x3 = earnings before interest and taxes/total assets

x4 =Market value of equity/total liabilities

x5 = Sales/total assets

Annual report

a document published each year by a company to show its financial condition and products

Common-size statement

Income statements and balance sheets in which the dollar figures have been converted into percentages. Then used to define trends.

Constant dollars

Dollars adjusted for inflation

Gross domestic product (GDP)

a measure of total output of goods and services within a country’s boarders

Index of sustainable growth

A calculation that shows how much of the growth rate of sales can be sustained by internally generated funds.

g*=[p(1-D)(1 + L)]/[T-P(1-D)(1+L)

P = (Net Profit before tax/Net Sales)x 100

D =Target dividend/Profit after tax

L = Total liabilities/Net worth

T =(total assets/Net sales)x100

Leverage ratio

An evaluation of how effectively a company utilizes its resources to generate revenue.

Debt to asset ratio, Debt to equity ratio, long term debt to capital structure, Time interest earned, Coverage of fixed charges, and current liabilities to equity.

Liquidity ratio

The percentage showing to what degree a company can cover its current liabilities with its current assets.

Current Ratio, Quick (acid test) Ratio, Inventory to net working capital, and Cash Ratio

Prime interest rate

The rate of interest banks charge on their lowest risk loans.

Profitability ratios

Ratios evaluating a company’s ability to make money over a period of time

Net profit margin, Gross profit margin, Return on Investment (ROI), Return on equity (ROE), and Earnings per share (EPS)

Ratio analysis

The calculation of ratios from data in financial statements to identify possible strengths or weaknesses.

SEC 10-k form

an SEC form containing income statements, balance sheets, cash flow statements, and information not usually available in an annual report.

SEC 10-q form

An SEC form containing quarterly financial reports

SEC 14-A form

An SEC form containing proxy statements and information on a company’s board of directors

Strategic audit worksheet

a tool used to analyze a case

5 steps in basic financial analysis

1. Scrutinize historical income statements and balance sheets. these provide most of the data needed for analysis.

2. Compare historical statements overtime

3. Calculate changes that occur in individual categories from year to year.

4. determine change as a percentage

5. adjust for inflation.