Lecture notes
Lecture notes BS2203 Financial Analysis (BS2203)
- Institution
- City University (City)
Lecture notes of 8 pages for the course BS2203 Financial Analysis at City (a)
[Show more]
Content preview
BS2203 Financial Analysis Notes and FormulasWeek 2: Activity and Liquidity Ratios
Activity Ratios
This is a family of ‘asset turnover’ (TO) ratios in order to measure how efficiently assets
generate revenues and operating performance is managed.
Revenue
Total Asset Turnover =
Total Assets
Revenue
Fixed Asset Turnover = (If it is lower than the norm, inefficiency, lower NBV
¿ Assets
for older assets or underutilised capacity).
Revenue
Working Capital Turnover = (if the denominator
Current Assets−Current Liabilities
is negative, the turnover is undefined).
Revenue
Receivables Turnover = (If it is lower than the norm, low credit quality
Receivables
or ineffective collection. If it is higher the norm, overly conservative credit policy
with sales lost to competitors).
Days∈Period
Days of Receivables Outstanding =
Receivables Turnover
Cost of Sales
Inventory Turnover = (If it is lower than the norm, lack of new
Inventory
technology or change in fashion. If it is higher than the norm, understocked or
ineffective inventory management).
Purchases
Payables Turnover = (Credit sales and purchases in receivables and
Payables
payables TO). If purchases are not available, we can approximate by COS + end
inventory – beginning inventory. (If it is lower than the norm, exploitation of lenient
supplier terms, trouble making payments on time. If it is higher than the norm,
taking advantage of early payment discounts, not taking full use of credit facilities).
Liquidity Ratios
These measure the ability to meet short-term obligations.
Current Assets
Current Ratio = (If it is higher than the norm, greater ability to
Current Liabilities
meet short-term obligations by liquidating current assets).
Cash+ ST Investments
Cash Ratio =
Current Liabilities
Quick Assets
Quick Ratio =
Current Liabilities
, Quick Assets = (Cash + ST investments) + Receivables. (This excludes prepaid
expenses often not convertible back to cash). Unreliable during market crisis due to
FV of ST investments decreasing significantly.
ST Investments = Short-term marketable securities that have high credit quality and
are highly liquid.
Quick Assets
Defensive Interval Ratio =
Daily Cash Expenditures
Daily Cash Expenditures = Average per day of all expenses less non-cash and tax.
Week 3: Liquidity, Solvency and Profit Margin Ratios
Cash Conversion Cycle
Cash Conversion Cycle = Days inventory on hand (DOH) + Days receivables
outstanding (DRO) – Days payables outstanding.
This measures the length of time from cash paid to cash received. If it is shorter the
norm, there is greater liquidity.
Operating Cycle = DOH + DRO. This starts with the carrying of inventory products for
sale. Companies manufacture or purchase these products in which raw material is
purchased from suppliers on credit. Inventories are sold and when receivables are
collected, the cash is used for the next operating cycle.
If CCC is negative at a really low number, they are having trouble to fund operating
activities from the sale of securities and product line.
Solvency Ratios
This is a family of debt and coverage ratios and variants. This measures the ability to fulfil
debt obligations by understanding the importance of debt in capital structure and the
adequacy of earnings and capital flow to cover interest and other fixed charges.
Analysing solvency, and the use of debt, is important in order to assess creditworthiness
and value of debt securities and assessing future business prospects.
Total Debt
Debt to Assets Ratio =
Total Assets
Total Debt
Debt to Capital Ratio =
Total Debt +Total Equity
Total Debt
Debt to Equity Ratio =
Total Equity
The 3 above ratios measure debt-paying ability in terms of the debt as a percentage
of the base. If this is higher than the norm, we have a weaker solvency (greater
financial risk).
Total Assets
Financial Leverage Ratio =
Total Equity
The ratio above measures the amount of total assets supported for each money unit
of equity. If it is higher than the norm, there is a weaker solvency (more leveraged).
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller nadeemismail. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £7.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
58716 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 15 years now