CMA Part 2 - Financial Decision Making - 2019
What are the five classifications of ratios?
- Liquidity ratios, which measure the sufficiency of the firm’s cash resources to meet its short-term cash obligations.
- Leverage, capital structure, solvency and earnings coverage ratios, which evaluate the firm’s ability to satisfy its debt and obligations for other fixed financing charges such as operating leases by looking at the mix of its financing sources and its historical earnings.
- Activity ratios, which provide information on a firm's ability to manage efficiently its current assets (accounts receivable and inventory) and current liabilities (accounts payable).
- Profitability analysis, which measures the firm’s profit in relation to its total revenue or the amount of net income from each dollar of sales and its return on invested assets.
- Market ratios and earnings per share analysis, or shareholder ratios, which describe the firm’s financial condition in terms of amounts per share of stock.
What is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBIT (earnings before interest and taxes) includes deductions for depreciation and amortization expensed. Therefore, EBITDA is EBIT plus depreciation and amortization expense, to “add back” the depreciation and amortization. EBITDA is used to analyze a company's earnings before interest and taxes as well as before the non-cash charges of depreciation and amortization.
What is a vertical common-size financial statement?
A simple vertical common-size financial statement covers one year’s operating results and expresses each component as a percentage of a total. For example, fixed assets will not be stated as a dollar amount but rather will be stated as a percentage of total assets. Each expense item will be stated as a percentage of total revenue.
What is horizontal trend series analysis?
Horizontal trend analysis is used to evaluate trends for a single business over a period of several years. The first year is the base year, and amounts for subsequent years are presented not as dollar amounts but as percentages of the base year amount, with the base year assigned a value of 100%, or 100.