1 Major Accounting Terms

 Asset - Any item of economic value owned by a

business, especially that which could be converted to
cash.

 Current assets are those that will be converted to cash

within one year. Typically, this could be cash, inventory
or accounts receivable. Fixed assets are long-term and
will likely provide benefits to a company for more than
one year, such as a real estate, land or major
machinery.
2 Major Accounting Terms

 Liability - A company's debts or financial obligations

incurred during business operations.
 Current liabilities are debts payable within one year, while long-
term liabilities are debts payable over a longer period.
 Equity - An ownership interest in a corporation in the
form of common stock or preferred stock. It is calculated
by taking the total assets minus total liabilities; also called
shareholder's equity or net worth or book value.
3 Major Accounting Terms

 Income - The amount a business receives for the goods

or services provided. The primary source of income is the
Revenue or Sales. Other examples of income include
commissions, dividend income from stocks, interest
income from bank accounts etc.
 Expenses - Costs that a business incurs through its
operations.
 Fixed expenses: payments like rent that will happen in a
regularly scheduled cadence.
 Variable expenses: expenses, like labor costs, power & fuel, etc.
that vary with production
 Proforma Income Statement
Gross Sales/Revenue
Less: Sales returns and allowances
Net Sales

Less: Cost of Good Sold

Beginning Inventory
Add: Goods Purchased/Manufactured
Less: Ending Inventory

Gross Profit

Less: Selling and Genral Administration expenses

Less: Advertising
Less: Marketing
Less: Employees expenses/Salary

Earnings before Interest, Tax, Depreciation and Amortization (EBITDA)

4 Less: Depreciation
Less: Amortization

Earnings Before Interest and Tax (EBIT) or Operating Profit

Less: Interest
Less: Tax

Profit after Tax (PAT) or Net Profit

 Fundamental Analysis – Ratio Analysis

 Current  Debt-  Receivabl  Net Profit  Sales per

Ratio Equity es Turnover Margin Share
 Quick  Debt-to-  Inventory  Gross profit  EPS
Ratio Capital Turnover Margin  P/E
 Cash Ratio  Debt-to-  Payables  Operating  P/BV
 Defensive Assets Turnover Profit  P/S
5 Interval  Financial  Total asset Margin  Dividend
 Cash Leverage Turnover  Return on Yield
Conversion  Interest  Fixed-Asset Equity,  EV/EBITDA
Cycle Coverage Turnover Asset,
 Fixed  Working Capital
Charge Capital
Coverage Turnover
6 Activity Ratios
Annual Sales
Receivables
Turnover Average
Receivables
Receivables turnover number of times per year that a business
collects its average accounts receivable.

365
Days of Sales
Outstanding Receivables
Turnover

The average collection period, or days of sales outstanding, is

the average number of days it takes for the company's
customers to pay their bills
7 Activity Ratios
COGS
Inventory
Turnover
Average Inventory

Inventory turnover is a measure of the number of times

inventory is sold or used in a year

Days of 365
Inventory on
Hand Inventory Turnover

The average inventory processing period, or days of inventory

on hand, is the average number of days it takes to sell
the inventory on hand
8 Activity Ratios
Purchases
Payables
Turnover
Average Trade Payables

Payable turnover ratio is a short-term liquidity measure used to

quantify the rate at which a company pays off its suppliers

365
Number of
Days Payable
Payables Turnover

Number of days payable is a ratio that measures the average

number of days that companies take to pay their trade
creditors
9 Activity Ratios
Total Asset Revenue
Turnover
Average Total Assets

The effectiveness of the firm's use of its total assets to create

revenue is measured by its total asset turnover

Fixed asset Revenue

Turnover
Average Net Fixed Assets

Similarly the utilization of fixed assets is measured by the fixed

asset turnover ratio
Working Revenue
Capital
Turnover Average Working Capital

How effectively a company is using its working capital is

measured by the working capital turnover ratio
10 Liquidity Ratios
Current Assets
Current ratio
Current Liabilities

Current ratio is a liquidity ratio that measures a company's ability

to pay short-term obligations
Cash+ Marketable securities+
Receivables
Quick ratio
Current Liabilities

Quick ratio or Acid test ratio measures the amount of liquid assets
available for each unit of current liabilities
Cash + Marketable Securities
Cash ratio
Current Liabilities

Cash ratio compares a company's most liquid assets to its current

liabilities
11 Liquidity Ratios
Defensive Cash+ Marketable Securities+ Receivables
Interval Average Daily Expenditures

The defensive interval ratio is another measure of liquidity that

indicates the number of days of average cash expenditures
the firm could pay with its current liquid assets

Cash Days of Days of Number of

Conversion Sales Inventory on Days
Cycle Outstanding Hand Payable

The cash conversion cycle is the length of time it takes to turn

the firm's cash investment in inventory back into cash, in the
form of collections from the sales of that inventory
12 Solvency Ratios
Total Debt
Debt-to-Equity
Total Shareholders Equity

The debt-to-equity ratio shows the proportion of equity and

debt a firm is using to finance its assets, and the ability for
shareholder equity to fulfil obligations to creditors in the event
of a business decline

Total Debt
Debt-to-Assets
Total Assets

The Debt-to-Assets ratio tells you the percentage of total

assets that were financed by creditors, liabilities, debt
13 Solvency Ratios
Average Total Assets
Equity
Multiplier
Average Total Equity

Financial leverage or Equity multiplier measures the portion of

assets that are financed through debt

EBIT
Interest
Coverage
Interest Payments

Interest Coverage ratio used to determine how easily a

company can pay interest on outstanding debt
14 Profitability Ratios
Net Income
Net Profit
Margin
Revenue

Net Profit Margin is the percentage of income earned after all

expenses have been deducted from the total revenue

Gross Profit
Gross Profit
Margin
Revenue

Gross Profit Margin is the percentage of income earned after

the Cost of Goods Sold (COGS) is deducted from the total
revenue
15 Profitability Ratios
EBIT
Operating
Profit Margin
Revenue

Operating Profit Margin is the percentage of income earned

after all operating expenses have been deducted from the
total revenue

Net Income
Return on
Assets
Average Assets

Return on Assets is the percentage of income earned by

utilizing the assets held for a particular period of time
16 Profitability Ratios
Net Income
Return on
Equity
Average Total Equity

Return on Equity is the percentage of income earned by

utilizing the equity shareholders’ fund for business activities

EBIT
Return on
Capital
Average Total Capital

Return on Capital is the percentage of income earned by

utilizing the capital raised through equity and debts for
business activities
17 Valuation Ratios
Total Revenue
Sales per share
Average Outstanding Shares

Sales per Share evaluates a company's business activities in

comparison to its share price

Net income – Dividend on Preferred

Stock
Earnings per
share
Average Outstanding Shares

Earnings per share is the portion of company’s profit allocated

to each outstanding share of common equity
18 Valuation Ratios
Market Price of the
Price to share
Earnings Ratio
Earnings Per Share

P/E ratio generally shows how much an investor is willing to

pay for an earnings of ₹1

Market Price Per Share

Price to Book-
Value Net Worth Per Share

Price To Book-Value is used to compare a share’s market

value to it book-value or intrinsic Value
19 Valuation Ratios
Market Price of the share
Price to Sales
Sales Per Share

Price to Sales Ratio indicates the value placed on each ₹ of a

company’s sales revenue

Annual Dividend Per Share

Dividend Yield
Market Price of the share

Dividend yield indicates how much a company pays out in

the form of dividends relative to its share price
20 Valuation Ratios
MV
Enterprise
MV Equity MV Debt Preferred
Value
stock

Cash and Minority

Investments Interest

Enterprise Value
Enterprise Value
Multiple
EBITDA

Enterprise Value Multiple depicts the estimated time it would

take an acquisition to earn enough to pay its costs
21 Du-Pont Analysis
Return on Net Profit Equity
Equity Margin Turnover

Return on Net Profit Asset Equity

Equity Margin Turnover Multiplier

Return on Tax Interest

EBIT margin
Equity Burden Burden

Asset Equity
turnover multiplier