Financial Reporting and Analysis

Formula Sheet

www.365careers.com
 Financial Reporting
and Analysis
BASICS OF ACCOUNTING

Basic Accounting
Assets = Liabilities + Equity
Equation

Net income Net income = Revenue – Expenses

Gross profit (income) Gross profit (income) = Revenue – Cost of goods sold

Operating profit (income) =

Operating profit (income) = Profit before interest and tax (PBIT) = Gross profit – Operating expenses

Profit Before Tax (PBT) Profit before tax (PBT) = PBIT – Interest expense

Net profit (income) =

Net profit (income) = PBT – Tax expense =
= Operating profit – Interest Expense – Tax expense
 Financial Reporting
and Analysis
UNDERSTANDING INCOME STATEMENTS
Net Income - Preferred Dividends
Basic Earnings Basic EPS =
per Share (EPS) Weighted average number of
common shares outstanding

Diluted Earnings Adjusted income available for common shares

per Share (DEPS) Diluted EPS =
Weighted average common and potential
common shares outstanding

[ ][ ][ ]
Convertible Convertible
Net
- Preferred
income dividends + preferred + debt (1 - t)
dividends interest
Diluted EPS =

( )( )( )( )
Shares from Shares from Shares
Weighted
average shares + conversion of + conversion of + issuable from
conv. pfd. shares conv. debt stock options

Gross profit
Gross profit margin Gross profit margin =
Revenue

Net profit
Net profit margin Net profit margin =
Revenue
 Financial Reporting
and Analysis
UNDERSTANDING BALANCE SHEETS

LIQUIDITY RATIOS

Current assets
Current ratio Current ratio =
Current liabilities

Cash + Short-term marketable securities + Receivables

Quick ratio Quick ratio =
Current liabilities

Cash + Short-term marketable securities

Cash ratio Cash ratio =
Current liabilities

SOLVENCY RATIOS

Long-term debt
Long-term Long-term debt-to-equity =
Total equity
debt-to-equity

Total debt
Total debt-to-equity Total debt-to-equity =
Total equity

Debt ratio Total debt

Debt ratio =
Total assets

Financial leverage Total assets

Financial leverage =
Total equity
 Financial Reporting
and Analysis
UNDERSTANDING CASH FLOW STATEMENTS

FREE CASH FLOW MEASURES

CFO = Cash flow from operations

Int = Cash interest paid
FCFF = CFO + [Int × (1 – tax rate)] – FCInv
FCInv = Fixed capital investment
(net capital expenditures)

NI = Net income
NCC = Non-cash charges
(depreciation and amortization)
FCFF = NI + NCC + [Int × (1 – tax rate)] – FCInv - WCInv Int = Cash interest paid
FCInv = Fixed capital investment
(net capital expenditures)
WCInv = Working capital investment

CFO = Cash flow from operations

FCInv = Fixed capital investment
FCFE = CFO – FCInv + Net borrowing
(net capital expenditures)
Net borrowing = Debt issued – debt repaid

CASH FLOW RATIOS

PERFORMANCE RATIOS

Cash flow from operations

Cash flow-to-revenue Cash flow-to-revenue =
Revenue

Cash flow from operations

Cash-to-income Cash-to-income =
Operating income

Cash flow from operations

Cash return-on-assets Cash return-on-assets =
Average total assets

Cash flow from operations

Cash return-on-equity Cash return-on-equity =
Average total equity

CFO - Preferred dividends

Cash flow per share Cash flow per share =
Weighted average number of
common shares
 Financial Reporting
and Analysis
UNDERSTANDING CASH FLOW STATEMENTS

CASH FLOW RATIOS

COVERAGE RATIOS

Cash fow from operations

Debt coverage Debt coverage =
Total debt

CFO + Interest paid + Taxes paid

Interest coverage Interest coverage = Interest paid

Cash flow from operations

Reinvestment ratio Reinvestment ratio =
Cash paid to acquire long-term assets

Cash flow from operations

Debt payment Debt payment =
Cash paid to repay long-term debt

Cash flow from operations

Dividend payment Dividend payment =
Dividends paid

Cash flow from operations

Investing and Investing and financing ratio =
financing ratio Cash outflows from investing
and financing activities
 Financial Reporting
and Analysis
RATIO ANALYSIS

ACTIVITY RATIOS
Meaning
Annual sales The efficiency of a company in collecting its
Receivables turnover = trade receivables
Average receivables

365 The average number of days a company

Days of sales outstanding = takes to collect its receivables from clients
Receivables turnover

Cost of goods sold The efficiency of a company in terms

Inventory turnover = Average inventory of inventory management

365 The average inventory processing period

Days of inventory on hand =
Inventory turnover

Purchases The efficiency of a company in allowing

Payables turnover = trade credit to suppliers
Average trade payables

365 The average number of days a company

Number of days of payables = takes to pay its suppliers
Payables turnover ratio

Revenue The efficiency of a firm in utilizing its fixed

Fixed assets turnover = assets
Average net fixed assets

The efficiency of a firm in managing its

Revenue
Working capital turnover = working capital (current assets - current
Average working capital liabilities)

Revenue The efficiency of a firm in using its total

Total assets turnover = assets to create revenue
Average total assets

Cash conversion cycle = Days of sales outstanding The number of days a company takes to
+ Days of inventory on hand convert its investments in inventory and
- Number of days of payables other resources into cash flows from sales

Revenue The efficiency of a firm in utilizing equity to

Equity turnover =
Average total equity create revenue
 Financial Reporting
and Analysis
RATIO ANALYSIS

LIQUIDITY RATIOS
Meaning

Current assets Ability to meet current liabilities

Current ratio = (with total current assets)
Current liabilities

Cash + Marketable securities + Receivables Ability to meet current liabilities

Quick ratio = (with total current assets, excluding
Current liabilities inventory)

Cash + Marketable securities Ability to meet current liabilities

Cash ratio = (with cash and marketable securities only)
Current liabilities

The number of days a company can cover

Defensive Cash + Marketable securities + Receivables
its average daily expenses with the use of
interval = Average daily expenditure current liquid assets only

SOLVENCY RATIOS

Total debt
Debt-to-equity = Debt as a percentage of total equity
Total shareholder’s equity

Total debt
Debt-to-capital = Debt as a percentage of total capital
Total debt + Total shareholder’s equity

Total debt Debt as a percentage of total assets

Debt-to-assets =
Total assets
Average total assets An indicator of a company’s debt
Financial leverage = financing usage
Average total equity
Earnings before interest and taxes
Interest coverage = The ability to cover interest expenses
Interest payments
Earnings before interest and taxes
The ability to cover interest and
Fixed charge + Lease payments
= lease expenses
coverage Interest payments + Lease payments
 Financial Reporting
and Analysis
RATIO ANALYSIS

PROFITABILITY RATIOS

Meaning

Gross profit Gross profitability as a percentage of total

Gross profit margin = revenue
Revenue

Operating income (EBIT) Operating profitability (before interest

Operating profit margin = and tax) as a percentage of total revenue
Revenue

EBT Operating profitability (before tax) as

Pre-tax margin = a percentage of total revenue
Revenue

Net income Net profitability as a percentage of total

Net profit margin =
Revenue revenue

Net income Net profitability (excluding interest and taxes)

Return on assets (ROA) = as a percentage of total invested funds
Average total assets

Operating return Operating profit (EBIT) Net profitability (including interest and taxes)
on assets (ROA) = Average total assets as a percentage of total invested funds

Operating profit (EBIT) Operating profitability as a percentage of

Return on total capital = total capital
Average total capital

Net income Net profitability as a percentage of total

Return on Equity (RoE) = Average equity equity
 Financial Reporting
and Analysis
RATIO ANALYSIS

VALUATION RATIOS

Meaning

Net Income - Preferred dividends

Earnings per Share (EPS) = Income earned per 1 common
Outstanding number of share outstanding
common shares

Share price The price that investors are

Price earnings (P/E) ratio = willing to pay per $1 of earnings
Earnings per share (EPS)

Market capitalization Total price that investors are willing to

P/E ratio (company wide) = pay for a company's Net income
Net income

Dividend per share The "portion "of a share price that is

Dividend yield = distributed as dividends
Current share price

Net income - Dividends declared The "portion" of Net income that is

Retention rate (RR) = reinvested in the company
Net income

Dividends declared The "portion" of Net income that is

Dividend payout = Net income distributed as dividends

Equity growth rate

Sustainable growth rate (g) = RR x ROE
RR = Retention rate
 Financial Reporting
and Analysis
RATIO ANALYSIS

DUPONT ANALYSIS

Return on Equity
(RoE)
Net income
Average equity

Net profit Equity

margin turnover
Net income
X Revenue
Revenue Average equity

Net profit Asset Financial

margin turnover leverage ratio
Net income X Revenue X Average assets
Revenue Average assets Average equity

Interest Operating Asset Financial

Tax burden turnover leverage ratio
burden profit margin
Net income
X EBT
X EBIT
X Revenue X Average assets
EBT EBIT Revenue Average assets Average equity
 Financial Reporting
and Analysis
INVENTORIES

Where:
FIFO = First-in, First-out method
LIFO = Last-in, First-out method

Ending inventory = Beginning inventory + Purchases - Cost of goods sold (COGS)

Cost of goods sold (COGS) = Beginning inventory + Purchases - Ending inventory

FIFO inventory = LIFO inventory + LIFO reserve

Δ Cash = Excess cash saved on

Δ Cash = LIFO reserve x Tax rate the valuation method

FIFO retained earnings = LIFO retained earnings + LIFO Reserve x (1 - Tax rate)

FIFO COGS = LIFO COGS - (Ending LIFO reserve - Beginning LIFO reserve)
 Financial Reporting
and Analysis
LONG-LIVED ASSETS

Cost-Salvage (residual) value

Straight-line depreciation expense =
Useful life

Double-declining balance (DDB)

Double-declining balance = 2 x (Cost - Accumulated depreciation) depreciation expense = Double the
(DDB) depreciation expense Useful life straight-line depreciation rate

Units of production Cost - Salvage value

= x Output units in the period
depreciation expense Life in output units

Ending PPE net book value = (Original) Cost – Accumulated depreciation

Accumulated depreciation
Average age =
Annual depreciation expense

Historical cost
Total useful life =
Annual depreciation expense

Ending PPE net book value

Remaining useful life =
Annual depreciation expense
 Financial Reporting
and Analysis
INCOME TAXES

Income tax expense = Taxes Payable + Δ Deferred Tax Liabilities (DTL) – Δ Deferred Tax Assets (DTA)

Income tax expense

Effective tax rate =
Pre-tax income

NON-CURRENT LIABILITIES

Interest expense = Market rate at Issuance × Balance sheet value of the liability at the beginning of the period

Coupon interest payment = Coupon rate (as per contract) x Par Value
www.365careers.com