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ACC 549, MBA 549, MBA 560: Financial Statement Analysis: Key terms

ACC 549, MBA 549, MBA 560 Financial Statement Analysis

Some Key terms

Accounts Receivable is the amount due to an organization for goods delivered or services rendered. Selling to customers on credit will generate accounts receivable for a business. 

Asset Turnover Ratio is Sales / Total assets. This ratio shows how effective the company is in generating sales from its assets.

 Cash flow margin measures how well a company converts sales revenue to cash. It reflects the relationship between cash flows from operating activities and sales. The management of cash flow is very important for profitability. A company with negative cash flow is losing money despite the fact that it's producing revenue from sales. That can mean that it might need to borrow money to keep operating.

Cost of Goods Sold (COGS) 

  • Includes all of the costs and expenses directly related to the production of goods.
  • Excludes indirect costs such as overhead and sales and marketing.
  • Deducted from revenues (sales) in order to calculate gross profit and gross margin. Higher COGS results in lower margins.
  • COGS differs from operating expenses (OPEX) in that OPEX includes expenditures that are not directly tied to the production of goods or services, while COGS excludes them.

Current Ratio Expresses the relationship between a company's most liquid assets and its liabilities that require repayment soon.

Current Assets are all assets other than fixed assets. They are either cash or assets expected to be converted into cash or consumed by the business during the year. Current assets include items such as cash, accounts receivable, and inventory.

Direct costs are those that are directly attributable to the product or service provided by the organization. They are included in the cost of goods sold.

Debt-To-Equity Ratio A company’s dependence on debt as a source of capital can be measured by comparing the amount of debt on its balance sheet to the level of equity it has (known as the debt-to -equity ratio). (Source: S&P Global); total liabilities. This is not a measure of short-term liquidity. It is a measure of creditor long-term risk. The lower the debt ration, the safer their position.  HOWEVER, this should also be compared to the Industry as a whole.

Debt Service Coverage Capacity  In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments. (Source: Investopedia - https://www.investopedia.com/terms/d/dscr.asp)

EBITDA The aggregate earnings before interest, taxes, depreciation, and amortization.

Gross profit margin is the difference between sales revenue and the costs related to the products sold, the aforementioned COGS. Gross margin compares gross profit to revenue. 

Net margin reflects a company's ability to generate earnings after all expenses and taxes are accounted for. It's obtained by dividing net income into total revenue. Net margin is an indication of the overall financial well-being of a business. It can indicate whether company management is generating enough profit from its sales and keeping all costs under control.

Operating margin is the percentage of sales left over after accounting for COGS as well as normal operating expenses (e.g., sales and marketing, general expenses, administrative expenses). It compares operating profit to revenue.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE could be thought of as the return on net assets. (source: Investopedia -- https://www.investopedia.com/terms/r/returnonequity.asp)

SWOT Strengths, Weaknesses, Opportunities, Threats - a report that can be found in EBSCO Business Source Complete and Gale Business Source Essentials

 

Types of Financial Statement Analysis

What are the different types of financial statement analysis?

There are three main techniques for analyzing a company’s financial statements.

  • Horizontal analysis compares a company's historical data. Usually, the purpose of horizontal analysis is to detect trends across different time periods.
  • Vertical analysis compares items on a financial statement in relation to each other. For instance, an expense item could be expressed as a percentage of company sales.
  • Ratio analysis, a central part of fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.  

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