Strategic Management and Business Policy 14th Edition – CH 12

Activity ratio
financial ratios that indicate how well a corporation is managing its operations

Inventory turnover, Days of inventory, Net working capital turnover, asset turnover, fixed asset turnover, average collection period, accounts receivable turnover, accounts payable period, and days of cash.

Altman’s Z-Value bankruptcy formula
Formula used to estimate how close a company is to declaring bankruptcy

Z= 1.2×1 +1.4×2+3.3×3+0.6×4+1.0×5

x1 = working capital/total assets
x2 = retained earnings/total assets
x3 = earnings before interest and taxes/total assets
x4 =Market value of equity/total liabilities
x5 = Sales/total assets

Annual report
a document published each year by a company to show its financial condition and products
Common-size statement
Income statements and balance sheets in which the dollar figures have been converted into percentages. Then used to define trends.
Constant dollars
Dollars adjusted for inflation
Gross domestic product (GDP)
a measure of total output of goods and services within a country’s boarders
Index of sustainable growth
A calculation that shows how much of the growth rate of sales can be sustained by internally generated funds.

g*=[p(1-D)(1 + L)]/[T-P(1-D)(1+L)

P = (Net Profit before tax/Net Sales)x 100
D =Target dividend/Profit after tax
L = Total liabilities/Net worth
T =(total assets/Net sales)x100

Leverage ratio
An evaluation of how effectively a company utilizes its resources to generate revenue.

Debt to asset ratio, Debt to equity ratio, long term debt to capital structure, Time interest earned, Coverage of fixed charges, and current liabilities to equity.

Liquidity ratio
The percentage showing to what degree a company can cover its current liabilities with its current assets.

Current Ratio, Quick (acid test) Ratio, Inventory to net working capital, and Cash Ratio

Prime interest rate
The rate of interest banks charge on their lowest risk loans.
Profitability ratios
Ratios evaluating a company’s ability to make money over a period of time

Net profit margin, Gross profit margin, Return on Investment (ROI), Return on equity (ROE), and Earnings per share (EPS)

Ratio analysis
The calculation of ratios from data in financial statements to identify possible strengths or weaknesses.
SEC 10-k form
an SEC form containing income statements, balance sheets, cash flow statements, and information not usually available in an annual report.
SEC 10-q form
An SEC form containing quarterly financial reports
SEC 14-A form
An SEC form containing proxy statements and information on a company’s board of directors
Strategic audit worksheet
a tool used to analyze a case
5 steps in basic financial analysis
1. Scrutinize historical income statements and balance sheets. these provide most of the data needed for analysis.
2. Compare historical statements overtime
3. Calculate changes that occur in individual categories from year to year.
4. determine change as a percentage
5. adjust for inflation.
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