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FS Analysis NOTES

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Horizontal Analysis- two periods
Sales
Cost of goods sold
2018
2019
Amount change
250,000
700,000
1,000,000
950,000
750,000
250,000
Percentage
change
3%
35.71%
Formula: Present year – Previous year= (Amount of change) / Previous year = percentage change
Vertical Analysis- single period
Sales
CGS
Gross profit
2019
2,000,000
1,200,000
800,000
Percentage
100%
60%
40%
Cash
Total assets
2019
150,000
2,200,000
Percentage
6.82%
100%
Formula: Accounts/base
Bases: Net Sales, Total Assets, Total Liabilities & Equity
Ratio Analysis
Liquidity
1. Current ratio = π‘‡π‘œπ‘‘π‘Žπ‘™ current π‘Žπ‘ π‘ π‘’π‘‘π‘ /π‘‡π‘œπ‘‘π‘Žπ‘™ current π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ : Can the company pay its
current liabilities with current assets?
2. Quick ratio = π‘‡π‘œπ‘‘π‘Žπ‘™ π‘žπ‘’π‘–π‘π‘˜ π‘Žπ‘ π‘ π‘’π‘‘π‘ /π‘‡π‘œπ‘‘π‘Žπ‘™ π‘π‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ : Can a company pay its current
liabilities with quick assets?
3. Working capital= Total current Assets- Total current liabilities
Acidity
4. A/R turnover = 𝑁𝑒𝑑 π‘π‘Ÿπ‘’π‘–π‘‘π‘‘ π‘ π‘Žπ‘™π‘’π‘ /π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ 𝐴/𝑅: How many times can an entity turn their
receivables to cash for a certain period?
5. Days A/R or Average collection period = 365/𝐴/𝑅 π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ: How many days an entity wait for
a receivable to become cash?
6. Inventory turnover=𝐢𝐺𝑆/π΄π‘£π‘’π‘Žπ‘Ÿπ‘”π‘’ π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦: How many times can an entity sell their
inventories and have it replaced within a period?
7. Days inventory or Average selling/conversion period = 365/πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ: How many
days does an entity holds on to their inventory before a sale transaction?
8. AP turnover = Purchases on account (Purchases = COGS + inventory end- inventory beg.) /
Average AP
9. Days A/P or Average payment period = 360/𝐴/𝑃 π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ
10. Total asset turnover = 𝑁𝑒𝑑 π‘ π‘Žπ‘™π‘’π‘ /π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘‘π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘: How many times can an entity
generate sales with their total asset resource?
11. Fixed asset turnover = 𝑁𝑒𝑑 π‘ π‘Žπ‘™π‘’π‘ /π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ net 𝑓𝑖π‘₯𝑒𝑑 π‘Žπ‘ π‘ π‘’π‘‘
Solvency ratio
Debt ratio = π‘‡π‘œπ‘‘π‘Žπ‘™ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ /π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ : How much of the assets are financed by debts?
Equity ratio = π‘‡π‘œπ‘‘π‘Žπ‘™ π‘’π‘žπ‘’π‘–π‘‘π‘¦/π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ 
Debt to equity ratio = π‘‡π‘œπ‘‘π‘Žπ‘™ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ /π‘‡π‘œπ‘‘π‘Žπ‘™ π‘’π‘žπ‘’π‘–π‘‘π‘¦: Which has more weight debt or equity?
Leverage ratio or Equity Multiplier = 1/ Equity ratio
Times interest earned = 𝐸𝐡𝐼𝑇/π΄π‘›π‘›π‘’π‘Žπ‘™ π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘: How many times can a company pay for
interest expenses with their operating income?
17. Basic earning power = 𝐸𝐡𝐼𝑇/π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ 
12.
13.
14.
15.
16.
Profitability ratio
18. Gross profit ratio = πΊπ‘Ÿπ‘œπ‘ π‘  π‘π‘Ÿπ‘œπ‘“π‘–π‘‘/𝑁𝑒𝑑 π‘ π‘Žπ‘™π‘’π‘ : How much gross profit does the company makes
after considering cost of goods that were sold?
19. ROS or profit margin ratio = 𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’/𝑁𝑒𝑑 π‘ π‘Žπ‘™π‘’π‘ 
20. ROA = 𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’/π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ : How much income was returned in the usage of assets to
generate profit?
21. ROE = 𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’/ Average total equity
22. EPS = 𝑁𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’−π‘ƒπ‘Ÿπ‘’π‘“π‘’π‘Ÿπ‘Ÿπ‘’π‘‘ 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑠/(𝐴𝑣𝑒. π‘œπ‘Ÿπ‘‘π‘–π‘›π‘Žπ‘Ÿπ‘¦ π‘ β„Žπ‘Žπ‘Ÿπ‘’π‘  π‘œπ‘’π‘‘π‘ π‘‘π‘Žπ‘›π‘‘π‘–π‘›π‘”) common
stock/par value
23. DPS = π΄π‘›π‘›π‘’π‘Žπ‘™ 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠/𝐴𝑣𝑒. π‘œπ‘Ÿπ‘‘π‘–π‘›π‘Žπ‘Ÿπ‘¦ π‘ β„Žπ‘Žπ‘Ÿπ‘’ π‘œπ‘’π‘‘π‘ π‘‘π‘Žπ‘›π‘‘π‘–π‘›g
24. Dividend payout ratio = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 per π‘ β„Žπ‘Žπ‘Ÿπ‘’/𝐸𝑃𝑆
25. Price earnings ratio = 𝑀ark𝑒𝑑 π‘π‘Ÿπ‘–π‘π‘’/𝐸𝑃𝑆
26. Dividend yield ratio = 𝐷𝑃𝑆/π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ π‘π‘Ÿπ‘–π‘π‘’
27. Earning yield ratio = 𝐸𝑃𝑆/π‘€π‘Žπ‘Ÿπ‘˜π‘’π‘‘ π‘π‘Ÿπ‘–π‘π‘’
DSO = (% that take the discount) (days they pay from date of purchase) + ( % that did not take the
discount) (days they pay from the date of purchase)
Ave. AR = (total sales a year/360) (DSO)
Operating cycle = Days inventory + Days AR
Cash conversion cycle= Operating cycle – Days AP
Investment in working capital= ( Produce a day)(Cost per day)(Cash conversion cycle)
Permanent asset= Fixed asset + lowest
Temporary asset = Highest-lowest
Aggressive -long term- 50% of permanent asset be financed with temporary financing
Short term financing= (lowest current asset * 50%) + total temp. asset
Long term financing= (lowest current asset* 50%)+ Fixed asset
Conservative-short term- 50% of temporary asset be financed with permanent financing
Short term financing= ( total temp. asset) * 50%
Long term financing= ( total temp asset) * 50% + total permanent asset
EFN external financing needed
increase in spontaneous net asset= increase in sales* % of SNA
minus
increase in retained earnings = sales next year* PM* RR
Receivable portfolio analysis
Average AR= (credit sales/ 360)* average collection period
Credit relaxation policy
Inventory management
EOQ= √2 ∗ 𝑑 ∗ π‘œ/𝑐
# of orders= annual demand/EOQ
Frequency= 360/# of orders
TOC=( annual demand/EOQ)(cost per order)
ACC= (EOQ/2)*(carrying cost per unit
TOC and ACC NOT in EOQ
Toc = Annual demand/ order size* cost per order
ACC= order size/2* carrying cost per unit
Reorder point= lead time* daily usage(annual demand/360)
Safety stock= reorder point in max- reorder point in normal
Lowest amount of stock out in safety stock
Stock out cost= stock out cost per occurrence* # of orders/ probability of running out of stock
Carrying cost= caarying cost per unit * unit of SS
TOTAL COST= STOCK OUT COST+ CARRYING COST
Cost of giving up cash discount=( CD/100%-CD)*(360/n) where N is payment date minus CD period or
Net minus CD period
Rate of giving up discount= (whole amount-amount taken in discount)/(amount taken in discount)
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