Profitability

ROE= NI/Avg Equity = NI/Avg Assets *Avg Assets/Equity = NI/Sales * Sales/Avg Assets * Assets/Equity = Net Income / Total Equity
ROE= ROA * leverage = Profit margin * asset turnover * leverage
ROE = NI/EBT *EBT/EBIT * EBIT/Sales *Sales/Assets * Assets/Equity = tax burden * Interest burden * EBIT margin * Asset turnover * leverage
ROA Equation 2 = (NI + Interest Expense(1-tax rate)) / Assets = Net Income / Total Assets
Gross profit margin = Gross profit/Revenue (ability to translate sales into profit after consideration of cost of products sold) gp=Rev - COGS
Operating profit margin = Operating profit/Revenue (ability to translate sales into profit after consideration of operating exp)
Net profit margin = Net profit/Revenue (ability to translate sales into profit after consideration of all expenses and revenues,
Activity ratios: how efficiently company performs its day to day activities
Working capital turnover = Rev/ avg working capital Fixed asset turnover = Revenue / avg net fixed assets
Total asset turnover = Rev / avg Total Assets Inventory turnover = Cost of sales / avg inventory > high is effective inv
mgmt
Days of inventory on hand (DOH) = 365/inv turnover Receivables turnover = Rev / avg receivables > high>efficient credit
collection
Days of sales outstanding (DSO) = 365/ receivables turnover Payables turnover = purchases / avg trade payables > high > paying on time
Number of days of payables = 365 / payables turnover High Inventory turnover and low rev growth > inadequate inventory levels
High receivables turnover + low sales growth > credit and collection policies are too strict > sales being lost to competitors offering lenient
te
High TAT > greater efficiency of generating revenues using assets > 1.2% profit for every 1$ asset > labor intensive vs capital intensive
Low Payables turnover > trouble paying on time OR taking advantage of early credit discounts > high> not taking advantage of credit
facilities
• Cash conversion cycle (net operating cycle) = Days sales outstanding + Days inventory held – Number of days of payables
Debt ratios Solvency (sufficient resources to cover long term Liquidity (ability to meet short term obligations)
obligations)
Debt-to-assets ratio = Total Debt / Total Assets Current ratio = Current Assets/Current Liabilities
Debt-to-capital ratio = Total Debt / Total Debt + Total Equity Quick ratio = (Cash + Short-term marketable
investments + Account receivables)/Current liabilities
Debt-to-equity ratio = Total Debt / Total Equity Cash ratio = (Cash + Short-term marketable
Common size long term liabilities / total assets > % of assets financed with debt investments)/ Current liabilities
Financial leverage ratio = Average Total Assets / Average Total Equity Working Capital = Current assets – current liabilities
Coverage ratios amount of numerator per unit of Common size > cash / total assets >if higher> more
denominator liquid
Interest coverage = EBIT/Interest Payments Fixed charge = EBIT + lease paym/Interest Payments+lease Payments
coverage
Valuation measure quantity of an asset or flow associated with ownership
P/E = Price per share / Earnings per share P/BV= Price per share / Book value per share Retention rate= 1 –
P/CF= Price per share / Cash flow per share Dividend payout ratio = Dividends per share / earning per Dividend payout ratio*
share Working Capital
P/S= Price per share / Sales per share Dividend yield = Dividends per share / price
Beg Retained Earnings +NI –Dividends= Ending Retained Earnings Beg common stock +Issuance- Repurchases= End Common Stock
Selling Price – Book Value = Gain or loss on sale where BV=initial cost – A/D Owner Equity = Retained Earnings + Paid in capital
Unpaid Accrued Expense: Dr. Exp/ Cr. Payable Adj Dr. Payable/Cr. Cash Unbilled Accrued Revenue: Dr. AR/Cr. Revenue Adj Dr. Cash/Cr. AR
Prepaid Expenses: Dr. Prepaid Expense/Cr.CashAdj Dr. Expense/Cr. Unearned deferred Revenue: Dr. Cash/cr. Unearned Revenue liability 
Prepaid Expense Assets. Expenses, dividends Dr. + Cr - Adj Dr. Unearned Revenue/ Cr. Revenue
Straight line Dep = (Cost – Salvage value)/useful life. * Net Book Value = Depreciation Rate = (100%/useful life) * acceleration factor (2 if double
Cost – Acc Dep > cost model whereas revaluation model asset at fair value declining) -> last year different > lower NI early period
Basic EPS = (NI - Preferred Dividends)/ weighted avg shares outstanding Where preferred dividends = convertible preferred * dividend $/share
Diluted EPS (Convertible Preferred Stock) =NI / (weighted avg shares Diluted EPS (Convertible debt) = (NI + after tax interest on conv debt -
outstanding+ new shares issued at conversion) Prefer Dividends)/ (weighted avg shares outstanding+ X shares would have
issued).= NI + [Debt x interest %] x [1 – Tax %] – pref div / shares + X
Weighted avg shares outstanding = number of shares x 6/12 + (old + new Diluted EPS (Treasury Stock)= (NI – Preferred dividends)/(Weighted avg
shares issued) * 3/12 + … each step compute TOTAL issues shared shares outstanding + New shares issued at option exercise – Shares that
could have been purchased with cash received upon exercise).
Shares that could have been purchased with cash received upon exercise = Beg PP&E +Purchases – Disposition = Ending PP&E
(Options Shares *Exercise Price)/Share Price ie company would repurchase Beginning balance + purchases – ending balance = Gross BV equipment sold
Selling Price – Book Value = Gain or loss on sale where BV=initial cost – A/D Beginning balance A/D + dep exp – ending balance A/D= BV equipment sold
put selling price in CF investing and gain/loss in operating + Gross BV equipment = Net Book Value for equipment sold
Percentage completion preferred when outcome, costs, and amount of revenue can be measured reliably. Estimate what % is complete and
report % of contract revenue in income statement. Profit reported each year > % completed = actual cost incurred / estimated total cost
Completed contract does not report any revenue until contract is finished. Report everything cost and revenue in final year > same period=%
Installment outcome cannot be measured. Profit is recognized by % of total sales price received in cash. Profit = cash recv x (price -cost)/price
Cost recovery does not record profit until cash received > costs intermediary
Gross reporting owner of goods rev = sales, cost of sales = total expenses. Net report does not own gds rev=sales-COGS, exp=other like direct
 Indirect method CF operations = NI +(Dep/Amortization) +losses- gains- Inc Direct Method= Cash received– Cash Paid
Assets +Dec Assets + Inc Liabilities – Dec Liabilities – inc inventory CF financing = proceeds from bonds + issuance common stock+ paid in cap
CF investing = proceeds from selling longterm assets – cost of buyingLT asset - dividends – cash paid for long term debt
Capitalizing Increase Profitability ratios in the first year (ROE and Net Margin) but lower profitability than Expensing (expenses sooner)in subsequent years
Accelerated Depreciation early stages Higher Dep Exp, Lower Operating Profit CF investing includes capitalized expenses >> Net Income and Total Assets
margin, lower ROA, assets, & tax, but higher asset turnover >> higher later and Equity are higher >> CF from operating is higher >> TAT will be lower
Useful life = Historical Cost PP&E / Annual dep Exp carrying =PV of bond Interest Expense = carrying *Market rate PAY ATTENTION to n= 4 carrying
Cash Interest Payment = principal*coupon rate*time Amortization of Discount= Interest Expense – Cash Interest Payment (PMT
Gain or loss on repurchase = Net Bond Payable – repurchase payment Coupon<market rate => discount ; coupon > market rate => premium
Proceeds from bond = PV when pmt = +fv* coupon and fv=facevalue of bond Proceeds from interest on bonds = PV when PMT=fv*coupon and FV=0
Cash and B/P increase by proceeds from bond if at par or discount same CF financing inflow = bond proceeds = PV where fv=face and pmt=fv*coup
Cash paid to suppliers = COGS + inc inventory – inc A/P – dec. inv. + dec A/P => Cash received from customers = Revenues + dec A/R – inc A/R
CF operating direct: cash received from customers – cash paid to supliers + dividends received – tax paid – net interest and other expens paid
CF investing direct: Proceeds on disposals of property – payment on investment in property + government grants received-acquisition busines
CF financing direct: - dividends paid + proceeds on issue bonds + proceeds on loans – repayment of loans – cancellation of bonds + paidin cap.
Beginning balance of equipment + purchases of equipment – ending balance of equipment = historical cost of equipment. Book Value =<- A/D
Beginning accumulated depreciation + dep expense for the year – ending balance of acc dep = acc dep on equipment sold. Gain=cash recei-BV
NI = increase in Retained Earning + dividends paid. PAY ATTENTION TO CAHNGE IN STOCK AND PAID IN CAPITAL not absolute value in CF finan
IF company takes loan specifically to buy equipment, interest on that loan is capitalized as part of machine’s cost = loan amount * interest *
years until construction is completed > interest is cost of borrowing > financing CF unless it is capitalized > investing with cost of LT assets
COGS includes product cost + shipping+ customs … Inventory costs includes direct labor + raw materials + overheads security electr, delivery
Sales Revenue – COGS = Gross Profit – SG&A costs = EBIT – interest = EBT – Tax = Net Income / Loss
Consignment goods: do NOT represent a sales transaction > no exchange of ownership between buyer and seller > revenue only commission
I/S impairment loss and bad debt expense > both reduce NI.... B/S allowance for impairment and allowance for bad debt > both reduce assets
I/S depreciation expense and amortization expense (intangible items) … B/S Accumulated depreciation and accumulated amortization
Finite intangible assets are subject to amortization whereas infinite intangible assets are subject to impairment losses e.g. goodwill
Solutions for A/R : 1) factoring 2) discounts for cash … Factoring A/R with recourse: selling receivables for cash at a discount, we bear all risk …
without recourse selling A/R at discount f cash no risk. Solutions for Debt 1) restructuring for debt >conditions become stricter and cost is
higher which is riskier 2) refinancing over long period of time. Equity financing is expensive (share price is very low)
Weighted average cost COGS = (total purchases $ / total units purchased) * number of units sold
When prices are increasing, LIFO -> higher COGS Lower ending inventory > higher income > lower taxes>> any increase is profitability due to
liquidation is not sustainable. LIFO reserve is not sustainable, only in short run it will increase profitability> in long run FIFO and LIFO = same
FIFO and LIFO affects TAT and Debt to equity ratio Periodic System: COGS = Beg Inv +Purchases – Ending Inv
NI FIFO = NI LIFO + decrease COGS (or Increase LIFO reserve)- taxes on Equity FIFO = Equity LIFO + Retained earnings
Increase profit. Sales – COGS = gross profit. Ending inv. = remaining unsold x cost
Liabilities FIFO = Liabilities LIFO + Accumulated deferred tax Net Realized Value = Selling Price – Cost of Completion and Sale
Unrealized gains/losses from Trading securities recognized as retained Unrealized gains/losses from available for sale securities recognized as other
earnings comprehensive income
Unrealized gains/losses from held to maturity securities are not Amortized cost (financial assets held to maturity) = Amount asset recognized
recognized. – Principal repay +- amortization of discount or premium- reduction for
Inventory (FIFO method) = Inventory (LIFO method) + LIFO reserve Impairment
When inv. Costs are decreasing, FIFO has higher cost goods available for When inv. Costs are increasing, FIFO has lower cost goods available for sale,
sale, lower ending inv, gross and operating profit, and income all lower higher ending inv, gross and operating profit, and income all higher
Beg Accumulated other Comprehensive Income (AOCI) + other Extraordinary items are nonrecurring and does not relate to
Comprehensive Income = Ending AOCI discontinued operations
LIFO Reserve = FIFO Inv – LIFO Inv COGS FIFO = COGS LIFO – Increase in LIFO reserve
Impairment loss (IFRS) = Carrying- Recoverable. Recoverable is the Impairment loss (GAAP)= Carrying- Fair value (if Carrying > Undiscounted
(Higher of PV or (Fair Value – cost to sell) Cash flow)
Avg age of asset = Acc Dep/Annual Dep Exp Avg remaining life = net PP&E/Annual dep Exp

straight-line method, the discount (or premium) is evenly amortised over the life of the bonds
discount divided by 5 years + PMT = annual interest expense under st line method and
premium:: PMT – premium/5 = annual interest expense in st line method
value of liability = PV bond + interest expense – interest payment
finance (capital) lease is equivalent to the purchase of some asset whereas operating lease
expensed in I/S

Cash flow coverage ratios

Debt coverage CFO ÷ Total debt Financial risk and financial leverage
Interest coverage (CFO + Interest paid + Taxes paid) ÷ Interest paid Ability to meet interest obligations
Reinvestment CFO ÷ Cash paid for long-term assets Ability to acquire assets with operating cash
Debt payment CFO ÷ Cash paid for long-term debt repayment Ability to pay debts with operating cash flows
Dividend payment CFO ÷ Dividends paid Ability to pay dividends with operating cash flows
Investing and financing CFO ÷ Cash outflows for investing and financing activities Ability to acquire assets, pay debts, and make distributions to owners