1. Current Ratio

FormulaCurrent assets/Current liabilities

2. Debt/Equity ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Formula

Total liabilities (or LTD)/ Shareholder's equity

3. Debtors Turnover Ratio (Receivables Turnover Ratio)

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales.

By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.

A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

4.     Creditors Turnover Ratio

5.     Profitability ratios

Fixed assets:- assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.

Secured vs. Unsecured LoansThere are two basic categories that most loan types fall into – Secured and Unsecured.

Secured Loan

Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien is placed on such item. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put up to secure a loan as well.

Secured loans are usually the best (and only) way to obtain large amounts of money. A lender is not likely to loan a large amount with assurance that the money will be repaid. Putting your home or other property on the line is a fairly safe guarantee that you will do everything in your power to repay the loan. 

Secured loans are not just for new purchases either. Secured loans can also be home equity loans or home equity lines of credit. Such loans are based on the amount of home equity, which is simply the current market value of your home minus the amount still owed. Your home is used as collateral and failure to make timely payments could result in losing your home.

Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than unsecured loans. As the term implies, a secured loan means you are providing "security" that your loan will be repaid according to the agreed terms and conditions. It's important to remember, if you are unable to repay a secured loan, the lender has recourse to the collateral you have pledged and may be able to sell it to pay off the loan. 

Examples of Secured Loans:

Mortgage Home Equity Line of Credit Auto Loan (New and Used) Boat Loan Recreational Vehicle Loan

 

Unsecured LoanOn the other hand, unsecured loans are the opposite of secured loans and include things like credit card purchases, education loans, or personal (signature) loans. Lenders take more of a risk by making such a loan, with no property or assets to recover in case of default, which is why the interest rates are considerably higher. If you have been turned down for unsecured credit, you may still be able to obtain secured loans, as long as you have something of value or if the purchase you wish to make can be used as collateral.

When you apply for a loan that is unsecured, the lender believes that you can repay the loan on the basis of your financial resources. You will be judged based on the five (5) C's of credit -- character, capacity, capital, collateral, and conditions – these are all criteria used to assess a borrower's creditworthiness. Character, capacity, capital, and collateral refer to the borrower's willingness and ability to repay the debt. Conditions include the borrower's situation as well as general economic factors.

Examples of Unsecured Loans:

Credit Cards Personal (Signature) Loans Personal Lines of Credit Student Loans (note that tax returns can be garnished to repay delinquent student loans) Some Home Improvement Loans

Noticed EBITDA has been a common source of confusion. I hope this helps anyone with SA or FT

interviews coming up. I left out some of the minutiae to keep it as relevant as possible.

----------------------------------------------

EBITDA = Earnings Before Interest Taxes Depreciation and Amortization

EBITDA = Operating Income + Depreciation + Amortization

= EBIT + Depreciation + Amortization

= Net Income + Income Tax Expense + Interest Expense + Depreciation + Amortization

***For advanced readers: it will also exclude stock based compensation in most instances since this is a

non-cash charge**

Why do we prefer EBITDA over Net Income to gauge the strength/weakness of the firm?

1) In general, it is a much stronger indicator of ongoing, operational strength for the firm.

2) Taxes are considered "non-operational" in a sense because they can be affected by a variety of

accounting and tax conventions. These have no bearing on the ongoing, operational strength of the firm.

Companies with significant losses in the past will have "artificially" low taxes rates once they become

profitable due to something called NOLs (e.g. Biotechs, Technology co's).

3) Interest expense is a function of leverage, not operations. Companies in any given industry will have

varying degrees of interest expense based on the debt load they incur.

4) Depreciation expense is an accounting convention based on the PP+E of the firm. It has no bearing on

the ongoing operational strength of the firm. Firms with high capital requirements (manufacturing, autos,

retail, aircraft builders, airlines, transports) will have very high depreciation expense due to the nature of the

assets they hold. We need to take depreciation "out" in order to see how the firm's operations actually

performed in a given year

5) Amortization expense is another accounting convention dealing with the amortization of intangibles.

Because it is an accounting convention, we want to take it "out" also. Companies with significant intangible

assets on their balance sheets will have material amortization expenses reducing operational income.

These usually result from acquisitions.

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Cash Flow from Operations (CFO/OCF)

CF from Ops

= Net Income + Depreciation + Amortization - Chg in Non Cash Current Assets(Inventory, A/R) + Chg in

Non Debt Current Liabilities(A/P, Deferred Revs) + Non-Cash Items

= Net Income + Depreciation + Amortization - Chg Non Cash Working Capital + Non-Cash Charges

Why do we need Cash Flow from Operations when we already have EBITDA?

The key OPERATIONAL distinction between EBITDA and CFO/OCF is the Change in Net Working

Capital. CFO/OCF are also burdened by taxes and interest expense.

Both will usually exclude the non-cash, one-time items.

There are many operational factors which come into account in the Change in Net Working Capital:

a) Deferred Revenue --> there are certain products and services a company can sell which will not show up

in the traditional revenue account on the income stmt. A great example is the iPhone. Apple can only

recognize (3/24) of the revenue of each iPhone they sell in a given quarter. As a result, EBITDA and Net

Income are severely understated if we want to know Apple's operational performance for a given time

period. However, the remainder of the revenue shows up in the Operating Section of the Cash Flow

Statement. Compare Apple's Net Income to their Cash Flow from Operations to see the effect.

b) Operational Efficiency --> one example is inventory management. If a company needs more inventory,

then that will require spending cash that could be put to other uses. This means that the current asset,

inventory, goes up and "uses" cash. Another example is credit policy. What would be preferable, a

company which only takes cash or one that allows you to push off payment for a year @ 0% interest. If a

company records $100 of revenue but does not collect cash, then accounts receivable (current asset) will

rise and "use" cash.

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Free Cash Flow (FCF)

Unlevered FCF = Free Cash flow to Firm (FCFF) = EBIT(1-T) + D&A - Change in NonCash WC - CAPEX

The FCFF represents the cash flows available to ALL investors after mandatory cash outflows for business

needs have been taken out (including taxes).

The reason we need FCF instead of EBITDA and OCF is the CAPEX adjustment. Any capital intensive

company will be spending money on a regular basis to buy/modify/upgrade/replace their fixed assets

(stores, machines, equipment, airplanes). Capex can represent a significant reduction in cash flow for

many of these companies. Look at the Cash Flow Statement for any of the airlines to see the effect. Capex

is an ongoing, operational cash outflow that must be considered.

Negative Working Capital Can Be Good ... Sometimes

Some companies can generate cash so quickly they actually have a negativeworking capital. This is generally true of companies in the restaurant business (McDonald's had a negative working capital of $698.5 million between 1999 and 2000). Amazon.com is another example. This happens because customers pay upfront and so rapidly, the business has no problems raising cash. In these companies, products are delivered and sold to the customer before the company ever pays for them.

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Working Capital

Corporate Financing

Stocks for Beginners

Small Business Value

Balance Sheet

understand how a company can have a negative working capital? Think back to our

Warner Brothers / Wal-Mart example. When Wal-Mart ordered the 500,000 copies of

a DVD, they were supposed to pay Warner Brothers within 30 days. What if by the

sixth or seventh day, Wal-Mart had already put the DVDs on the shelves of its stores

across the country? By the twentieth day, they may have sold all of the DVDs. In the

end, Wal-Mart received the DVDs, shipped them to its stores, and sold them to the

customer (making a profit in the process), all before they had paid Warner Brothers!

If Wal-Mart can continue to do this with all of its suppliers, it doesn't really need to

have enough cash on hand to pay all of its accounts payable. As long as the

transactions are timed right, they can pay each bill as it comes due, maximizing their

efficiency.

The bottom line: A negative working capital is a sign of managerial efficiency in a

business with low inventory and accounts receivable (which means they operate

 

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on an almost strictly cash basis). In any other situation, it is a sign a company may

be facingbankruptcy or serious financial trouble. You can tell if this is the case by

comparing a company's accounts payable to the total inventory on the balance

sheet.

Buying a Company for Free

If you can buy a company for the value of its working capital, you essentially pay nothing for the business. Going back to our Goodrich example; the company has $933 million in working capital. There are currently 101.9 million shares outstanding, which means each share of Goodrich stock has $9.16 cents worth of working capital. If GR's stock was trading for $9.16, you would basically be purchasing the stock for free (paying $1 for each $1 the company had in its checking account, inventory, etc.). You would pay nothing for the company's fixed assets (such as real estate, computers, & buildings) and earnings.

For the past ten or twenty years, it has been incredibly rare for a company to trade

that low. You can still use the basic concept to your advantage; if you can find a

business that is trading for working capital plus half the value of the fixed assets, you

would be paying $0.50 for every $1.00 of assets.