What is vertical analysis?
Vertical Analysis converts financial statement information to ratio form:
- Income statement items as % of net sales
- Balance sheet items as % of total assets
Purpose: Facilitates comparison across companies and accounts.
What is horizontal analysis?
Examines changes in financial data across time to:
- Analyse performance
- Predict future performance
Formula: [(Second year amount - Base year amount) / Base year amount] x 100
Define Return on Equity (ROE)
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- Measures profitability from shareholder investment
- Indicates company performance effectiveness
How is ROA (Return on Assets) calculated?
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- Evaluates profit earned on each dollar of assets
- Insight: Operational efficiency without financing effects
What does Return on Financial Leverage (ROFL) signify?
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- Gauges financial leverage impact on ROE
- High ROFL indicates strong use of debt to enhance ROE
Explain DuPont Analysis of ROA
Disaggregates ROA into:
- Profit Margin (PM)
- Asset Turnover (AT)
- Purpose: Reveals profitability & efficiency.
Define Profit Margin (PM)
and what is it affected by?
Measures profit generated from each dollar of sales. Affected by:
- Gross profit level
- Operating expenses
- Competition & pricing control
Define Asset Turnover (AT)
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Reflects productivity by sales per dollar of assets. Improved by:
- Increasing sales revenue
- Reducing assets
What is Gross Profit Margin (GPM)?
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- % of sales left after product costs
- Indicates cost control effectiveness
What is Expense-to-Sales (ETS) Ratio?
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- % of sales spent on expenses
- Useful for managing specific cost categories
Describe Accounts Receivable Turnover (ART)
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- Assesses receivable collection rate
- High ART suggests efficient receivable collection
What does Inventory Turnover (INVT) measure?
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Inventory Turnover (INVT) assesses inventory sales rate.
High INVT indicates efficient inventory management
Explain Property, Plant & Equipment Turnover (PPET)
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PP&E Turnover (PPET) gauges asset utilisation.
Insight: Operational efficiency in using fixed assets
What is the Current Ratio?
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Current Ratio measures short-term liquidity:
Higher Ratio implies better liquidity
What is Working Capital?
- Working Capital is the excess of current assets over current liabilities
- Positive working capital indicates more short-term inflows than outflows
Define the Quick Ratio
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Quick Ratio evaluates liquidity excluding inventory:
Shows readiness to meet immediate obligations
Explain Operating Cash Flow to Current Liabilities (OCFCL)
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OCFCL relates operating cash to current liabilities:
Insight: Company’s debt repayment ability from operations
Define Debt-to-Equity Ratio
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Debt-to-Equity Ratio shows reliance on debt vs. equity financing:
Higher ratios indicate increased risk and lower solvency
What is Times Interest Earned (TIE)?
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Times Interest Earned (TIE) shows earnings to interest expense ratio:
Higher TIE indicates lower risk of default
