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Horizontal & Vertical Analysis


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horizontal analysis
The study of percentage change in comparative statements is called:
Trend percentages.
What is a form of horizontal analysis.
What is the trend % formula?
Trend %= Any year $/Base year$ x 100
the company has high liquidity. Most companies have around 30%
High amounts of current assets (cash, cash equiv., other current assets) in comparison to the comparable company averages suggests that....
A low percentage of total assets in relation to property, plant, and equipment may suggest...
that the nature of the companies operations do not require lots of buildings and equipment.
strong company because most of the equity is internally generated rather than externally generated (Through stock shares.)
When majority of the equity (which is part of liabilities) is retained earnings and other equity, it shows the sign of a...
A common-size statement reports only:
percentages--the same percentages that appear in a vertical analysis.
Dollar Value Bias
The bias one sees from comparing numbers in absolute (dollars) rather than relative (percentage) terms.
Benchmarking
The practice of comparing a company with other leading companies.
What are the two types of benchmarking?
Benchmarking against a key competitor and benchmarking against the industry average.
What is the working capital ratio?
Working Capital= Current assets- Current liabilities
Working capital
What measures the ability to meet short-term obligations with current assets?
What is the current ratio formula?
Current Ratio= current assets/current liabilities. (Measures the ability to pay current liabilities with current assets)
What is the norm for a company's current ratio, as reported by the Risk Management Association?
1.5... A ratio of 1.85 is considered strong but keep in mind that a ratio too high such as 25 would indicate that the company is too liquid and not using its assets effectively.
acid-test ratio AKA quick ratio
Which ratio tells us whether the entity could pay all its current liabilities if they became due immediately?
What is the quick ratio?
Acid-test Ratio= Cash + Short-term investments + Net current receivables/ Current Liabilities (shows ability to pay all current liabilities if they became due immediately)
The inventory turnover ratio
Which ratio measure the number of times a company sells its agerage level of inventory during a year?
What is the inventory turnover ratio?
Inventory turnover= COGS/Average Inventory (indicates salability of inventory--the number of times a company sells its inventory during a year)
The accounts receivable turnover ratio.
Which ratio measures the ability to collect cash from credit customers?
What is the ART ratio?
ART= Net credit sales/ ave. net AR (measures the ability to collect cash from customers)
How do you find the average net accounts receivable?
Add the beginning accounts receivable balance and the ending balance, then divide by two.
Debt ratio
What is the relationship between total liabilities and total assets?
What is the debt ratio formula?
Debt ratio= Total liabilities/Total assets (indicates percentage of assets financed with debt)
They range from .57-.67
What is the average debt ratio for most companies?
No
Does the debt ratio say anything about the ability to pay interest expense?
Times-interest-earned ratio.
What do analysts use to relate income to interest expense?
What is the Times-interest-earned ratio?
Times-interest-earned ratio= income from operations/ Interest expense (measures the number of times operating income can cover interest expense)
Rate of return on sales ratio?
Return on Sales= Net Income/Net Sales
What does the return on sales ratio tell us?
It shows the percentage of each sales dollar earned as net income.
Return on Assets
s success in using assets to earn a profit?
What is the ROA formula?
ROA= Net income + Interest expense/ average total assets (measures how profitably a company uses it's assets)
Rate of return on common stockholders equity or return equity
Which ratio shows the relationship between net income and common stockholders equity?
What is the ROE formula?
ROE= Net income- preferred dividends/ average common stockholders equity (gauges how much income is earned for each dollar invested by the common shareholders)
Outstanding stock= Issued stock-treasury stock
What is the outstanding stock formula?
What is the formula for earnings per share of common stock?
EPS of Common Stock= Net income-preferred dividends/Number of shares of common stock outstanding (gives the amount of net income earned for each share of company's common stock)
Price/earnings ratio
The ratio of the market price of a share of common stock to the company's earnings per share?
What is the P/E ratio?
P/E= market price per share of common stock/ earnings per share (indicates the market price of $1 of earnings)
Dividend yield
The ratio of dividends per share to the stock's market price per share?
What is the dividend yield formula?
Dividend yield on common stock= dividend per share of common stock/ market price per share of common stock (shows the percentage of a stocks market value returned as dividends to stockholders each year)
What is the book value per share of common stock ratio?
Book Value per share of common stock= total stockholders equity- preferred equity/ number of share of common stock outstanding (indicates the recorded accounting amount for each share of common stock outstanding)
What do experts argue about book value?
That it is not useful for investment analysis.
Rate of return on net sales= net income/net sales
What shows the percentage of each sales dollar earned as net income?
Days sales in receivables= average net accounts receivable/one days sales
What shows how many days sales remain in accounts receivable-- how many days it takes to collect the average level of receivables
Horizontal analysis definition:
study of percentage changes in comparative financial statements
Vertical analysis definition:
Analysis of financial statement that reals the relationship of each statement item to a specific base, which is the 100% figure.