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Investment Decisions summary
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A full sumarry of the Investment Decisions trainings and lectures.
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Investment decisions summaryWeek 1
Three key financial statements:
- Balance sheet
- Income statement
- Cashflow statement
Balance sheet = assets = liabilities + stockholders’ equity
- Debit: what does the company have
- Credit: how is it financed
The Stockholders’ report= a report that publicly owned corporations must provide to
stockholders. It describes their operations and financial conditions over the past year
- Constructed according to the Generally Accepted Accounting Principles (GAAP)
practice & procedure guidelines to prepare and maintain financial records and
reports; authorized by the Financial Accounting Standards Board (FASB)
The Income Statement = Is a `video`. It shows HOW changes in the company´s value have
been affected by a company´s operations over the past period (year).
Statement of Retained Earnings= reconciles the net income earned during a given year, and
any cash dividends paid, with the change in retained earnings between the start and the end
of that year.
,Cash is king when determining the financial health of a company. When a company has
insufficient cash to pay its maturing obligations bankruptcy.
Statement of Cash Flows= = a summary of the firm’s Operating, Investment, and Financing
cash flows and illustrates the changes in cash & marketable securities. It ties together the
income statement and previous and current balance sheets.
- NEVER count DEPRECIATION as a CASH OUTFLOW
Assessing performance and financial health using the ratio analysis: interpret the
performance and financial health of a company by using the financial statements and
applying ratio analysis.
- Liquidity Ratios
- Activity Ratios
- Debt Ratios
- Profitability Ratios
- Market Ratios
Interested parties of finical ratios:
- Current and prospective shareholders are interested in the firm’s current and future
level of risk and return, which directly affect share price.
- Creditors are interested in the short-term liquidity of the company and its ability to
make interest and principal payments.
- Management is concerned with all aspects of the firm’s financial situation, and it
attempts to produce financial ratios that will be considered favorable by both
owners and creditors.
Liquidity Ratios = ratios to analyse IF a company can pay its SHORT-TERM obligations.
- Current ratio = Current assets ÷ Current liabilities
should be above 1.0.
- Quick ratio (acid test)= Current assets – Inventory ÷ Current liabilities
Should be 1.0 or up.
Activity Ratios= how fast does a company convert “things” into cash inflows or outflows
- Inventory turnover (times per year the entire inventory is sold) = Cost of goods sold ÷
Inventory
- Average Age of Inventory (time inventory lies in a warehouse)= 365÷Inventory
turnover
- Average collection period (time it takes to get the money from customers) =
Accounts receivable ÷ Average sales per day
Average sales per day = Sales / 365
- Average payment period (time it takes to pay your suppliers) = Accounts payable ÷
average purchase per day
Average purchases per day = COGS / 365 OR a % of COGS / 365
(Cash + Marketable securities) : Sales per day
- Supermarkets stable and continuous sales pattern relatively low cash levels
- A jewelry store unstable and uncertain sales patterns high cash levels
, Total Asset turnover= the efficiency with which a firm uses assets to make a sale.
- How many things do you need in order to make a sale The more efficient you are
the less things you need to achieve the SAME sales level.
- Total asset turnover = Sales ÷ Total assets
Week 2
Debt Ratios
- Debt ratio (what you owe/ what you own) = Total liabilities ÷ Total assets %
higher then 100% is bad when liquidating now (total liabilities > total assets)
- Times interest earned ratio = EBIT ÷ Interest
Using Financial Ratios: Types of Ratio Comparisons
- Cross-sectional analysis is the comparison of different firms’ financial ratios at the
same point in time; involves comparing the firm’s ratios to those of other firms in its
industry or to industry averages.
- Benchmarking is a type of cross-sectional analysis in which the firm’s ratio values are
compared to those of a key competitor or group of competitors that it wishes to
emulate.
- Time-series analysis is an evaluation of the firms’ financial performance over time
using financial ratio analysis.
When using Ratio Analysis be aware of:
- Ratios that reveal large deviations from the norm merely indicate the possibility of a
problem.
- A single ratio does not generally provide sufficient information from which to judge
the overall performance of the firm.
- The ratios being compared should be calculated using financial statements dated at
the same point in time during the year.
- Definitions must be the same (nominator / denominator)
- Numbers can be manipulated
Profitability Ratios
-
- Operating profit margin = Operating profits (EBIT) ÷ sales
- Net profit margin = Earnings available for common stockholders ÷ Sales
- Earnings per share = earnings available for common stockholders ÷ number of
shares of common stock outstanding
- Return on total assets (ROA) = Earnings available for common stockholders ÷ Total
assets
- Return on Equity (ROE) = Earnings available for common stockholders ÷ Common
stock equity (common stock = returned earnings)
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