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Ratio Analysis. Introduction.

This is the preliminary article of the Financial Statements Analysis series. The Ratio Analysis is a heavily tested topic in CMA Part 1 (new syllabus) and you should expect 25-30 questions during the exam on this topic. Truly, I am very glad that I've passed it already!

I'll consider the formulas for computing problems. This type of questions must be solved very quickly because of the time pressure.

Some of the parameters may be defined in various ways. For example, the numerator of the Return on Investment ratio (ROI) is the Net Income after Interest and Taxes, but may be adjusted in some cases by adding back minority interest in the income of a consolidated subsidiary or adding back interest expense. We'll consider the basic formulas because the exam questions contain only these ratios with high probability. If the question suggests using of additional parameters then you'll find all necessary data in the statement of a question.

Let us use the following notations:

ACommEquity - Average common equity
AccP - Accounts Payable
AccR - Accounts Receivable
AccRTurn - Accounts receivable turnover ratio
ATA - Average total assets
CA - Current Assets
CL - Current Liabilities
DaysInv - Days sales in inventory
DaysR - Days sales in receivables
EBIT - Earnings before interest and taxes
EPS - Earnings per share
FLR - Financial Leverage ratio also called Equity Multiplier         (leverage factor)
I - interest expenses
InvTurn - Inventory turnover ratio
NI - Net income after interest and taxes
PrefDiv - Preferred dividends
QA - Quick Assets
ROE - Return on common equity ratio
ROI - Return on invested capital ratio
Tax - Taxes
TAssetsTurnover - Total assets turnover ratio
WorkCap - Working Capital

Posted by mazoo at April 27, 2005 10:25 PM

Related posts:

Ratio Analysis. Short-term liquidity. Part 2. Jun 24, 2005
Ratio Analysis. Short-term liquidity. Part 1. May 27, 2005
Ratio Analysis. Return on Invested Capital May 03, 2005

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