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Chap 005
Chap 005
Financial Statement
Analysis
Revsine/Collins/Johnson/Mittelstaedt: Chapter 5
5. How short-term liquidity risk and long-term solvency risk are assessed.
6. How to use the Statement of Cash Flows to assess credit and risk.
EBI
Sales
Return on assets
EBI
ROA= X Asset turnover
Average assets
Sales
Average assets
Analysts do not always use the reported earnings, sales and asset figures. Instead, they
often consider three types of adjustments to the reported numbers:
Current assets
Current ratio =
Current liabilities
Liquidity
ratios Cash + Marketable securities + Receivables
Quick ratio =
Current liabilities
Short-term
liquidity Net credit sales
Accounts receivable turnover =
Average accounts receivable
Inventory purchases
Accounts payable turnover =
Average accounts payable
Long-term debt
Long-term debt to assets =
Total
Debt ratios assets
Long-term debt
Long-term debt to tangible assets =
Total tangible assets
Long-term
solvency
Operating incomes before taxes and interest
Interest coverage =
Interest expense
Coverage
ratios
Operating cash flow Cash flow from continuing operations
to total liabilities = Average current liabilities + long-term debt
X
Financial structure leverage
Average assets
Average common
shareholders’ equity
Leverage neutral
But they can be no better than the data from which they are
constructed.
However:
There is no single “correct” way to compute financial ratios.
Financial ratios don’t provide the answers, but they can help you ask
the right questions.