# FIN 357 Lecture Notes - Lecture 3: Financial Statement Analysis, Inventory Turnover, Asset Turnover

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1. Chapter 3: Financial Statements Analysis and Financial Models

a. Financial statement analysis

i. First step in comparing financial statements if to standardize them (to account for size

or language differences) work with percentages

ii. Common-size statements

1. Use percentage of total assets (balance sheet) or revenues (income statement)

iii. EPS: net income divided by the number of shares outstanding

iv. EBIT: earnings before interest expense and taxes

1. EBIT = Total operations revenues – total operations expenses

v. EBITDA: earnings before interest expense, taxes, depreciation and amortization

1. EBITDA = EBIT + depreciation +amortization

b. Ratio analysis

i. Short-te soley o liuidity easues: poide ifoatio o fi’s liuidity; fi’s

ability to pay its bills over short run

1. Current ratio = current assets/current liabilities

a. Usually, the higher, the better

2. Quick ratio = (current assets – inventory)/current liabilities

a. Large inventories could mean short-term trouble

b. The idea is that inventory is relatively illiquid compared to cash

3. Cash ratio = cash/current liabilities

a. For short-term creditors

ii. Long-te soley easues: leeage atios fi’s aility to eet log-term

obligations

1. Total debt ratio = (total assets – total equity)/total assets

a. The result (n) means that the firm uses n% debt

2. Debt equity = total debt/total equity

3. Equity multiplier = total assets/total equity (this is one plus debt equity)

4. Times interest earned (TIE) ratio = EBIT/Interest

a. How well the firm has its interest obligations covered

b. Also called interest coverage ratio

5. Cash coverage ratio = [EBIT + (Depreciation + Amortization)]/Interest

a. Also EBITDA/Interest

b. We add depreciation/amortization because interest is a CASH outflow

and D/A are noncash expenses

6. Recent measure:

a. Interest bearing debt (notes payable and long term debts)/EBITDA

iii. Asset management of turnover measures: efficiency of asset use

1. Inventory turnover = COGS/Inventory

a. The results is the number of times the inventory has been used up or

tued oe

b. A higher number usually means more efficiency

2. Days’ sales i ietoy = 3/ietoy tu oe

a. Means that inventory sits n days before it is sold

3. Receivables turnover = sales/accounts receivable

a. Collected out outstanding credit accounts 12.3 times in the year

4. Days sales in receivables = 365/Receivables turnover

a. # of days it takes to collect credit sales

5. Total asset turnover = sales/total assets

a. Results: for every dollar in assets, how much we generate in sales

iv. Profitability measures

1. Profit margin = net income/sales

a. $ in income for every dollar in sales

2. EBITDA margin = EBITDA/sales

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