Copporate Finance: Chapter - 2, Financial Statements and Cash Flows

Balance sheet: An accountant's snapshot of a firm's accounting value on a particular date, as though the firm stood momentarily still.

Liquidity: The ease and quickness with which assets can be converted to cash (without significant loss in value).

Current Assets: most liquid and include cash and assets that will be turned into cash within a year from the sate of the balance sheet.

Accounts receivable: amounts not yet collected from customers for goods or services sold to them.

Inventory: composed of raw materials to be used in production, work in progress, and finished goods.

Fixed assets: the least liquid kind of assets.

Liabilities: obligations of a firm that require a payout of cash within a stipulated period.

Stockholders equity: is a claim against the firm's assets that is residual and not fixed.


Market value: is the price at which willing buyers and sellers would trade the assets.


Book value/ carrying value: Accounting value of a firm's assets.

book/Accounting value and market value need not be same.

Management's job is to create a market value for the firm that exceeds its book vakue.

Average tax rate: is your tax amount divided by your taxable income. Its the percentage of your income that goes to pay taxes.

Marginal tax rate: is the tax you would pay (in %) if you earned one more dollar.

Short-term liquidity measures:

 - Current ratio = current assets/current liabilities

 - Quick Ratio = (current assets - Inventory) / Current liabilities
 
- Cash Ratio = Cash/ Current liabilities


Long-term liquidity measure:

- Total debt ratio = (total assets - total equity)/Total assets
- Times interest earned (TIE) = EBIT (Eearnings before interest expense and taxes)/Interest
- Cash coverage ratio =
         EBITDA ( Earnings before interest expense, taxes, depreciation and amortization) / Interest
 cash coverage ratio measures a firm's ability to generate cash from operations and it is frequently used as a measure of cash flow available to meet financial obligations.


Turnover Measures:

Inventory turnover = cost of goods sold/inventory

Days sales in inventory = 365 days / Inventory turnover

Receivables turnover = Sales/accounts receivable

Days sales in receivables = 365 days / receivables turnover


Profitability measures:

Profit margin = net income/sales

EBITDA margin = EBITDA/Sales

Return on Assets = Net income / total assets

Return of Equity = Net income/Total equity

Market Value Measures:

Earnings per share (EPS) = Net income / shares outstanding

Price-Earnings ratio = price per share / earnings per share

Market-to-Book ratio = Marvet value per share / Book value per share


Market Capitalization = firm's stock price per share X number of outstanding shares

Enterprise Value = market capitalization = market value of interest bearing debt - cash


Du-Pont Identity:

ROE = Net income / Total equity
         = (Net income / assets) X (Assets / Total equity)
         =ROA X Equity multiplier

         = (Net income / Sales) X (Sales/Assets) X (Assets / Total equity)

ROE =Profit margin X Total Asset turnover X Equity multiplier