01 Financial Analysis Fundamentals
Four steps in financial analysis
1. gather
2. calculate
3. analyse
4. benchmark
main categories for ratios
1. performance-based ratios
a) return & profitability
b) asset utilization
2. health-based ratios
a) liquidity
b) solvency
Which financial statement(s) do you need to calculate return ratios?
Income Statement & Balance Sheet
Which financial statement(s) do you need to calculate profitability ratios?
Income Statement
return ratios
= evaluating investment returns
1. ROA
2. RONA
3. ROE
4. ROIC
profitability ratios
= "margin ratios"
1. Gross Margin Ratio
2. Expense Ratio
3. Effective Tax Rate Ratio
4. Tax Burden Ratio
5. Effective Interest Rate Ratio
6. Interest Burden Ratio
ROA
"return on assets"
= net income / total assets
RONA
"return on net assets"
= net income / net assets
= net income / (assets - cash - AP)
= net income / (PP&E + NWC)
ROE
"return on equity"
= net income / total equity
ROIC
"return on invested capital"
"cash-on-cash"
= NOPAT / (net D + E)
= EBIT*(1-t) / (D + E - cash)
Gross Margin Ratio
= gross profit / revenue
Expense Ratio
(in)direct operating costs / revenue
Effective Tax Rate Ratio
total taxes / EBT
Tax Burden Ratio
net income / EBT
relation between effective tax rate and tax burden
effective tax rate ratio + tax burden ratio = 100%
Effective Interest Rate Ratio
= total interests / total interest bearing liabilities
Interest Burden Ratio
= EBT / EBIT
asset utilization ratios
1. asset turnover ratio
2. PP&E turnover ratio
3. cash turnover ratio
4. cash days
5. A/R turnover ratio
6. A/R days
7. inventory turnover ratio
8. inventory days
asset turnover ratio
= revenue / total assets
PP&E turnover ratio
= revenue / PP&E
cash turnover ratio
= revenue / cash
cash days ratio
= ( cash * 365 ) / revenue
A/R turnover ratio
= revenue / (A/R)
A/R days ratio
= ( (A/R) * 365 ) / revenue
inventory turnover ratio
= COGS / inventory
inventory days
= ( inventory * 365 ) / COGS
Why increase debt rather than equity?
1. Ownership
2. Cost
3. Flexibility
4. Timing/Availability
5. Tax
leverage/solvency ratios
"evaluate LT financial health"
1. Assets to Equity
2. Liabilities to Equity
3. Debt to Equity
4. Debt to Tangible Net Worth
5. Debt to EBITDA
6. Net Debt to EBITDA
Liquidity Ratios
"evaluate ST financial health"
1. Current Ratio
2. Quick Ratio
3. Interest Coverage Ratio
current ratio
current assets / current liabilities
quick ratio
= (current assets - inventory) / current liabilities
interest coverage ratio
= EBITDA / interest expenses
operating leverage
"shows fixed vs variable costs"
= % change in EBIT / % change in revenue
financial leverage
"shows how much debt financing is used"
= % in net income / % change in EBIT
total leverage
= operating leverage * financial leverage
= % change in net income / % change in revenue
growth ratios
1. asset
2. revenue
3. profitability
operating vs financial leverage
operating leverage occurs when there are fixed costs
financial leverage occurs when there's debt financing
DuPont Analysis
"structured approach to understanding the factors driving a company's profitability and efficiency through the ROE"
3-Step = Net Profit Margin * Total Asset Turnover * Financial Leverage
("Is change in ROE due to changes in profitability, asset utilisation, or leverage?")
5-Step = Tax Burden * Interest Burden * EBIT Margin * Total Asset Turnover * Financial Leverage