Valuation Financial Statements, ratio analysis, forecasting Questions and Answers

Valuation Financial Statements, ratio analysis, forecasting Questions and Answers Accounting measures past, not cash flows, not worth, now accurate, book value book value unlikely to reflect what assets could be sold for now and many assets that do not appear on balance sheet but positively impact future cash flows contribute to firm value market value to calculate current worth and if current operations add value than it will be greater than book value valuation timing differences change in retained earnings = net income - dividends link between two Free cash flows EBIT - Taxes + D&A + change in Operating Current Assets - change in Operating Liabilities net sales - cogs gross profit gross profit - sga EBIT EBIT - taxes NOPAT NOPAT + DA + Change in operating current assets - Change in operating current liabilities - change in gross fixed assets - change in other LT assets Free cash flows change in short term debt + change in long term debt - interest after taxes + change in preferred stock - preferred dividends - excess cash + change in other + change in common stock + change in paid in surplus + change in treasury stock - common dividends Cash flows paid to investors free cash flows + cash flows paid to investors actual cash flows Sources of funds decrease in assets, increase in liabilities or equities. Asset sales/withdraw cash, speed up collections or inventories, take out a loan, slow down payments, issue common stock, decrease dividend payout Uses of funds increase in assets, decrease in liabilities, or decrease inequity. Deposit cash, buy assets, slow down collections or inv, repay a loan, speed up payments, repurchase common stock, increase dividend payout Treasury Stock sources and uses Increase in treasury stock (more negative) = use of cash; decrease in treasury stock (less negative) = source of cash. AD sources and uses Increase in accumulated depreciation = source of cash (contra-asset ↑ → net PPE ↓); decrease in AD = use of cash. Gross margin How much profit after paying for the product itself (core production efficiency). Operating margin How profitable the entire business model is before financing (efficiency of operations) EBIT Margin Operating profitability after non-cash charges (how well operations generate true economic profit). Net Margin How much money the company actually keeps after everything (ultimate profitability). Current Ratio Ability to pay short-term bills using all short-term assets. Quick Ratio Ability to pay short-term bills without selling inventory. Cash Ratio Ability to pay short-term bills using only cash on hand. AR Days (Collection Period) How long it takes customers to pay you. AP Days (Payment Period) How long you take to pay suppliers. Inventory Days How long inventory sits before being sold. AR Turnover How many times per year you collect your receivables (higher = faster collection). AP Turnover How many times per year you pay suppliers (lower = slower payment) Inventory Turnover How many times inventory cycles through the business (higher = more efficient). EBIT Interest Coverage (TIE) How many times operating profit covers interest. EBITDA Interest Coverage Same idea but more generous (adds back non-cash items). Debt to Equity (Book) Balance-sheet version of how levered the firm is. Debt to Equity (Market) Market-value version (more realistic for valuation). Debt to Capital % of the capital structure coming from debt. Debt to Enterprise Value Debt as a fraction of total firm value.