Current ratio
current assets/current liabilities
-traditionally you want a ratio above 1, but not necessarily a good thing --> possible to be investing too much in the company in an inefficient way
Quick ratio
(cash + marketable securities + receivables/current liabilities)
more conservative version of the current ratio, assumes inventory can't be liquidated that quickly
Asset turnover ratio
(sales/avg. total assets)
how quickly do you "sweat" your assets, how many sales do you make for each asset
NWCturnover
sales/average net working capital
check NWC def?
Day's sales in inventory/Inventory turnover days
(average inventory/COGS) x 365
Tells us how many days an item will stay in stock before being sold on average
Inventory turnover ratio
(COGS/average inventory)
how many TIMES the inventory must be replaced per year
Day's sales outstanding/debtor days
(receivables/sales) x 365
Net profit margin
Net profit [or EBIT - taxes - interest] / sales
Return on Assets (ROA)
(EBIT - tax)/average total assets
Return on Equity (ROE)
net income/average shareholders equity
(can include non-controlling interests, but make sure to include total profit)
Net Debt/EBITDA
(short term debt + long term debt - cash)/EBITDA
- how many years of gross cash flow it will take to repay your debt (answer in "times" rather than years
PE ratio
stock price/earnings per share
Dividend yield
dividend per share/stock price
ROA - 2 components
(asset turnover) x (profit margin)
(sales/assets) x (EBIT - taxes - interest/sales)
ROE - 3 components
(ROA)(leverage ratio)(debt burden)
leverage ratio = assets/equity
debt burden = EBIT - taxes - interest/EBIT - taxes
EBIT margin/ratio
operating profit (EBIT) / revenue (sales)
cost of sales/cost of goods sold
(opening stock + purchases - closing stock)
WACC (made up formula with complication)
(%capital from debt x cost of debt)(1 - tax rate) + (%capital from equity x cost of equity)
ROCE definition + 2 components
EBIT / capital employed (equity + debt + minority interest)
-how much a company earns on its capital employed before the cost of financing
ROCE = EBIT margin (x) asset turnover
EVA
-basically the difference between the return on capital and the cost of capital
-causes managers to focus more on capital employed (rather than just sales or margins)
-Criticisms: doesn't measure present value (eg a project that has negative EVA for the f
preferred stock
takes priority over common stock with regards to dividends (payed after debt but before dividends)
net worth
Book value of common shareholder's equity plus preferred stock.
Default Risk
the likelihood that a firm will walk away from its obligation, either voluntarily or involuntarily.
Bond Ratings
issued on debt instruments to help investors assess the default risk of a firm.
project financing
bank lends to a project without recourse to the owners above it (ex. of joint ventures)
capital leases vs. operating leases
long term leases are the equivalent of owning something, vs. short term
commercial paper
short term debt issued for up to 90 days, issued to investors or insurers, asset managers who want to park liquidity (credit rating required to issue)
sterling eurobond
currency different than the company's currency, nothing to do with the eurozone
prime rate / LIBOR
Benchmark interest rate charged by banks.
Sinking Fund
money set aside to repay debt in the future
callable bond
company issues a bond with the option to repurchase it earlier (value of a callable bond is more or less capped because investors know not too pay too much because the company could call it back, although the company may have to pay a penalty)
hierarchy of what gets paid in the event of a bankruptcy
senior secured debt
senior unsecured debt
subordinated debt (clearly debt)
mezzanine (has interest, but its not always paid; PIK payment in kind, often used in LBO transactions (leveraged buyout))
preferred shares (between debt and equity, sometimes calle
MBO vs. LBO
management buyout vs. leveraged buyout
Investment grade
borderline rating BBB for non-investment/junk bonds
- LBO are typically non investment grade
Private placement
sold to a smaller number of investors without a public offering, faster, less restrictive, cheaper than paying a rating agency to rate you
Protective covenants
companies agree to do or not do certain things when they borrow money, in order to protect bondholders
- ie not issue more debt, not sell a big part of the business, respect certain financial ratios (financial covenants)
warrant
like an option to buy shares from a company at certain price at or before a fixed date
convertible bond
bond that could be converted into equity in the future, cheap looking (low coupon) way for companies way to raise money
- if nothing goes wrong you get interest
- if company value goes up, option to buy shares
Indenture
the bond agreement between the borrower and a trust company. ("bond documentation" works fine)
Registered bond vs. bearer bond
electronically held vs. physically proved with paper
Accrued interest***
the amount of accumulated interest since the last coupon payment
mortgage bonds
long-term secured debt often containing a
claim against a specific building or property
negative pledge clause
you can't give away/sell your assets to somebody else" (because they act as collateral)
poison pills
any sort of financial instrument/structure that makes a company difficult to acquire - defense against predatory takeovers
payment in kind
option to capitalize the interest rather than paying it in cash (taking more risk, so you'll probably get a higher interest rate)
cash conversion cycle***
Inventory payable days + A/R days - A/P days
ROA vs. ROCE
so similar they are
almost
interchangeable
RoA = EBIT / assets = (EBIT / sales) x (sales / assets)
ROCE = EBIT / C.E. = (EBIT / sales) x (sales / capital employed)
--> capital employed can be different from assets