Financial Analysis and Reporting
23 chapters
1. Deferred Tax Valuation Allowances
[Verse 1]
When a company has losses from the past
They create deferred tax assets that should last
But management must ask a crucial question here
Will future profits make these benefits appear?
[Chorus]
More likely than not, that's the test we apply
If future taxable income seems too shy
Set up a valuation allowance today
To reduce the asset and show the true way
More likely than not, fifty percent or higher
If below that threshold, allowance required
[Verse 2]
Look at the evidence both positive and negative
Recent losses make the outlook less definitive
But if contracts and backlogs show income ahead
The deferred tax asset keeps its value instead
[Chorus]
More likely than not, that's the test we apply
If future taxable income seems too shy
Set up a valuation allowance today
To reduce the asset and show the true way
More likely than not, fifty percent or higher
If below that threshold, allowance required
[Bridge]
When you see an allowance on the balance sheet
It tells you management thinks recovery's not sweet
But if they reverse it in a future year
That means better times are drawing near
[Verse 3]
For analysts this matters more than you might think
It shows you management's view from the brink
Conservative companies set allowances high
While optimistic ones might let assets fly
[Chorus]
More likely than not, that's the test we apply
If future taxable income seems too shy
Set up a valuation allowance today
To reduce the asset and show the true way
More likely than not, fifty percent or higher
If below that threshold, allowance required
[Outro]
So when you see deferred tax assets there
Check if allowances show management's care
The fifty percent rule will guide your way
Through valuation allowance judgment day
2. Pension Accounting: Obligation and Plan Assets
[Verse 1]
There's a promise made to workers every day
When they retire, their pension's on the way
But behind the scenes, there's math we need to know
How much we owe and where the money goes
The company promises benefits ahead
Defined benefit plans, security instead
Of hoping market returns will be enough
They guarantee the payout, that's the stuff
[Chorus]
PBO and plan assets, that's the key
Pension benefit obligation, follow me
Assets in the trust fund, set aside
Funded status shows us, are we qualified
Balance sheet will tell the story true
Liability or asset, me and you
PBO and plan assets, don't forget
The funded status shows us where we're at
[Verse 2]
Present value of what we'll pay tomorrow
That's the PBO, no need to borrow
Calculate with service cost each year
Interest cost accumulates, crystal clear
Plan assets sit in trust funds, growing strong
Invested wisely, helping all along
Expected return builds up the pot
But actual return shows what we've really got
[Chorus]
PBO and plan assets, that's the key
Pension benefit obligation, follow me
Assets in the trust fund, set aside
Funded status shows us, are we qualified
Balance sheet will tell the story true
Liability or asset, me and you
PBO and plan assets, don't forget
The funded status shows us where we're at
[Bridge]
When plan assets exceed the obligation
We've got an asset, celebration
But when PBO is larger than our fund
Liability shows up, we're not done
Prior service costs and actuarial gains
Make the calculation harder to explain
But funded status keeps it crystal clear
Subtract PBO from assets, year by year
[Verse 3]
On the balance sheet, it's plain to see
Net pension asset or liability
If funded status positive, asset side
If negative, liability can't hide
The pension expense flows through income too
Service cost and interest, tried and true
Expected return reduces what we show
But that's a different song for you to know
[Final Chorus]
PBO and plan assets, that's the key
Pension benefit obligation, follow me
Assets in the trust fund, set aside
Funded status shows us, are we qualified
Balance sheet will tell the story true
Liability or asset, me and you
PBO and plan assets, now you know
The funded status shows which way to go
[Outro]
Pension accounting doesn't have to scare
With PBO and assets, you'll prepare
The balance sheet to show the funded state
Your CFA knowledge will be truly great
3. Pension Expense Components and Analysis
[Verse 1]
When companies promise pensions to their staff
There's more than meets the eye in the math
Five components make up the expense each year
Let me break them down so it's crystal clear
Service cost is what employees earn today
Interest cost makes obligations grow each day
Expected return reduces what we see
Amortization smooths what used to be
[Chorus]
S-I-E-A-A, pension parts in display
Service, Interest, Expected return away
Amortization twice to make it right
Prior service cost and gains overnight
Income statement shows the total sum
Balance sheet reveals what's yet to come
[Verse 2]
Service cost is compensation for work done
Added to projected benefit when year is done
Interest cost grows the obligation size
Like compound interest that multiplies
Expected return on assets brings relief
Reduces pension expense, provides belief
But actual returns can differ from the plan
Creating gains and losses, understand
[Chorus]
S-I-E-A-A, pension parts in display
Service, Interest, Expected return away
Amortization twice to make it right
Prior service cost and gains overnight
Income statement shows the total sum
Balance sheet reveals what's yet to come
[Bridge]
Prior service cost from benefit changes past
Amortized slowly, makes the impact last
Actuarial gains and losses too
Smoothed over time in what they do
Funded status tells the balance sheet story
Assets minus obligations, full glory
If underfunded, liability appears
If overfunded, asset perseveres
[Verse 3]
Analysis requires a deeper look inside
Don't just trust the smooth expense as guide
Check the footnotes for the real detail
Actual returns and assumptions tell the tale
Cash contributions differ from expense
Funding requirements make the difference dense
Watch for changes in the discount rate
They can make obligations fluctuate
[Chorus]
S-I-E-A-A, pension parts in display
Service, Interest, Expected return away
Amortization twice to make it right
Prior service cost and gains overnight
Income statement shows the total sum
Balance sheet reveals what's yet to come
[Outro]
Five components tell the pension story
From service cost to actuarial glory
Income statement and balance sheet combined
Give analysts the complete state of mind
4. Deferred Tax Assets and Liabilities
[Verse 1]
When accounting rules and tax codes don't align
There's a timing gap that draws a different line
Book income shows one thing, tax returns another
These temporary differences we need to discover
Assets get recorded when we pay too much in tax
Future benefits coming, that's an accounting fact
[Chorus]
Deferred tax assets when we pay ahead
Future deductions, tax relief we'll get instead
Deferred tax liabilities when we delay
Tomorrow's taxes that we'll have to pay
Timing differences create these balancing acts
Assets and liabilities, deferred tax facts
[Verse 2]
Bad debt provisions, warranty costs we estimate
Book expense today but tax waits for a later date
Depreciation methods can speed up or slow down
Straight line for books, accelerated wears the crown
When tax depreciation moves faster than the books
A liability appears in our financial looks
[Chorus]
Deferred tax assets when we pay ahead
Future deductions, tax relief we'll get instead
Deferred tax liabilities when we delay
Tomorrow's taxes that we'll have to pay
Timing differences create these balancing acts
Assets and liabilities, deferred tax facts
[Bridge]
Balance sheet positions from these timing games
Temporary differences with permanent names
Book basis versus tax basis shows the spread
Calculate the future, look ahead instead
[Verse 3]
Revenue recognition can create the gap
Installment sales or cash basis sets the trap
When book revenue comes before the tax is due
A liability emerges in our balance view
These items will reverse as time goes by
The differences will even out, that's why
[Chorus]
Deferred tax assets when we pay ahead
Future deductions, tax relief we'll get instead
Deferred tax liabilities when we delay
Tomorrow's taxes that we'll have to pay
Timing differences create these balancing acts
Assets and liabilities, deferred tax facts
[Outro]
Remember the rule for keeping track
Assets reduce future tax impact
Liabilities increase what's owed tomorrow
From timing differences we borrow
5. Cash Flow Statement Basics
[Verse 1]
Every business needs to know where money flows
In and out through every door it goes
Three main rivers tell the story clear
Operating, investing, financing here
Profit's good but cash is what you need
To pay the bills and make your business succeed
[Chorus]
Cash flow statement shows the way
Operating, investing, financing day by day
O-I-F remember these three
Operating, investing, financing's the key
Money in and money out
That's what cash flow's all about
[Verse 2]
Operating cash from daily work you do
Selling products, paying wages too
Customers pay and suppliers get their share
This is the cash from operations there
It's the heartbeat of your business life
Cutting through accounting's pretty knife
[Chorus]
Cash flow statement shows the way
Operating, investing, financing day by day
O-I-F remember these three
Operating, investing, financing's the key
Money in and money out
That's what cash flow's all about
[Verse 3]
Investing cash for future growth you spend
Buy equipment, sell assets in the end
Long-term choices for tomorrow's gain
Buildings, patents, trucks and manufacturing chain
Cash going out to build your dream
Cash coming in from assets you redeem
[Bridge]
Financing tells us how you fund the show
Borrowing money, watch the interest grow
Issue stock or pay dividends back
Loans and equity fill the financing track
Three sections paint the picture whole
Cash is king and cash's the goal
[Chorus]
Cash flow statement shows the way
Operating, investing, financing day by day
O-I-F remember these three
Operating, investing, financing's the key
Money in and money out
That's what cash flow's all about
[Outro]
When profits lie the cash will tell the truth
That's the power of this financial proof
Operating, investing, financing clear
Cash flow statement makes it crystal clear
6. Direct vs Indirect Method
[Verse 1]
When companies report their cash from operations
There are two different ways to show the information
Direct method lists the actual cash that flows
Every payment and receipt that comes and goes
Cash from customers, cash to suppliers
Interest and taxes, all the cash fires
Shows you exactly where the money went
A clear picture of how the cash was spent
[Chorus]
Direct shows the cash, what really moved around
Indirect starts with profit, then adjusts what's found
Direct is clear and simple, but takes more time to make
Indirect is easier, that's the path most companies take
Add back depreciation, subtract the gains
Adjust for working capital, that's how it remains
Direct or indirect, same total in the end
Choose your method wisely, on reporting you depend
[Verse 2]
Indirect method starts with net income on the page
Then adjustments come to turn that into cash we gauge
Add back depreciation, it's expense but not cash out
Subtract the gains on sales, remove that accounting clout
[Chorus]
Direct shows the cash, what really moved around
Indirect starts with profit, then adjusts what's found
Direct is clear and simple, but takes more time to make
Indirect is easier, that's the path most companies take
Add back depreciation, subtract the gains
Adjust for working capital, that's how it remains
Direct or indirect, same total in the end
Choose your method wisely, on reporting you depend
[Bridge]
Working capital changes need adjustment too
Accounts receivable up means cash we never knew
Inventory increases, that's cash we had to pay
Accounts payable up means cash we kept today
[Verse 3]
Most companies choose indirect, it's simpler to prepare
Using numbers from statements that are already there
But direct method's clearer for users who want to see
Exactly how the cash moved, where it came to be
[Chorus]
Direct shows the cash, what really moved around
Indirect starts with profit, then adjusts what's found
Direct is clear and simple, but takes more time to make
Indirect is easier, that's the path most companies take
Add back depreciation, subtract the gains
Adjust for working capital, that's how it remains
Direct or indirect, same total in the end
Choose your method wisely, on reporting you depend
[Outro]
Same cash flow total, just different ways to show
How operating activities made the money flow
7. Operating Cash Flow
[Verse 1]
When you want to see how business really flows
Look beyond the profit that the income statement shows
Operating cash flow tells the truest tale
Of money coming in and out without fail
From your core business activities each day
Not investments or financing along the way
[Chorus]
Cash from operations, that's the key
C-O-F-O, what we need to see
Cash receipts from customers at the door
Less the payments for expenses and much more
Operating cash flow shows us clear
If the business can survive year after year
[Verse 2]
Start with net income but that's not the end
Add back depreciation, it's not cash we spend
Accounts receivable going up means less cash flow
While payables increasing helps the money grow
Inventory rising takes cash from the till
Working capital changes show what's real
[Chorus]
Cash from operations, that's the key
C-O-F-O, what we need to see
Cash receipts from customers at the door
Less the payments for expenses and much more
Operating cash flow shows us clear
If the business can survive year after year
[Bridge]
Direct or indirect method, both will do
Direct shows receipts and payments coming through
Indirect starts with net income as the base
Then adjusts for timing to show cash in place
Both methods lead to the same final score
Operating cash flow, what we're looking for
[Verse 3]
Why does operating cash flow matter most
It's the lifeblood that keeps business at its post
Companies can show profit but still go broke
If the cash flow timing is just smoke
Sustainable operations need positive flow
To pay bills and grow, that's what we need to know
[Chorus]
Cash from operations, that's the key
C-O-F-O, what we need to see
Cash receipts from customers at the door
Less the payments for expenses and much more
Operating cash flow shows us clear
If the business can survive year after year
[Outro]
From core business operations
Cash flow revelations
That's what keeps the business strong
Operating cash flow all along
8. Investing and Financing Activities
[Verse 1]
When a company spends its cash today
On machines and buildings that will stay
That's investing flows we need to track
Equipment purchased, can't go back
Buying other companies too
Acquisitions help the business grew
Plant and property, technology
Long-term assets, strategically
[Chorus]
Investing flows and financing too
Show us what the company's gonna do
I-F-D remember these three
Investing, Financing, Dividends we see
Cash going out and coming in
Supporting operations to help them win
I-F-D the story's told
How business grows and shares are sold
[Verse 2]
Financing flows bring money in
When companies need cash to win
Issue stock to raise some funds
Sell bonds when extra cash is stunned
Borrowing from banks and more
Credit lines to build their store
But when they pay the money back
That's outflow on the financing track
[Chorus]
Investing flows and financing too
Show us what the company's gonna do
I-F-D remember these three
Investing, Financing, Dividends we see
Cash going out and coming in
Supporting operations to help them win
I-F-D the story's told
How business grows and shares are sold
[Bridge]
Dividends flow out to shareholders
Rewards for all the risk they bear
Debt payments reduce what's owed
Interest paid along the road
These activities support the core
Operations need this funding for
Growth and stability combined
Cash flow statement peace of mind
[Verse 3]
Sale of assets brings cash in
Old equipment, let's begin
Investments sold for profit gained
Investing inflows are maintained
Repurchase shares, treasury stock
Financing outflow, check the clock
Each transaction tells a tale
Of how the company will sail
[Chorus]
Investing flows and financing too
Show us what the company's gonna do
I-F-D remember these three
Investing, Financing, Dividends we see
Cash going out and coming in
Supporting operations to help them win
I-F-D the story's told
How business grows and shares are sold
[Outro]
Three sections make the statement whole
Operating, investing, financing goals
I-F-D will guide your way
Through cash flow statements every day
9. Free Cash Flow to the Firm (FCFF)
[Verse 1]
When a company earns its money each year
We need to see what's really clear
Not just the profit on the page
But cash that flows at every stage
Start with earnings before interest and tax
Add depreciation, get the facts
This operating cash will show
What the business really knows
[Chorus]
Free Cash Flow to the Firm, FCFF
Cash for everyone to see
All the holders of the debt
Equity owners, don't forget
Take the operating cash today
Minus capex that you pay
Minus working capital change
That's the formula, nothing strange
FCFF, FCFF
Cash available, can't you see
[Verse 2]
EBIT times one minus tax rate
Plus depreciation, calculate
That's your after-tax operating flow
Now there's more you need to know
Capital expenditures must go
Subtract them from your cash flow
New equipment, buildings too
These investments we'll deduct through
[Chorus]
Free Cash Flow to the Firm, FCFF
Cash for everyone to see
All the holders of the debt
Equity owners, don't forget
Take the operating cash today
Minus capex that you pay
Minus working capital change
That's the formula, nothing strange
FCFF, FCFF
Cash available, can't you see
[Bridge]
Working capital changes matter
If it grows, your cash gets flatter
Inventory, receivables rise
Cash goes down before your eyes
But if working capital shrinks
More cash flows, better than you think
This is why analysts love this tool
Valuation's golden rule
[Verse 3]
Why do we calculate this way
To value firms from day to day
FCFF shows the total pie
For all investors, that's no lie
Bondholders and shareholders share
This cash flow beyond compare
Discount it back at WACC rate
Enterprise value, calculate
[Chorus]
Free Cash Flow to the Firm, FCFF
Cash for everyone to see
All the holders of the debt
Equity owners, don't forget
Take the operating cash today
Minus capex that you pay
Minus working capital change
That's the formula, nothing strange
FCFF, FCFF
Cash available, can't you see
[Outro]
From EBIT to the final sum
FCFF shows where cash comes from
Available to all who hold
A stake in stories yet untold
10. Free Cash Flow to Equity (FCFE)
[Verse 1]
When a company makes its money flow
There's cash that's left after debts they owe
To equity holders this treasure goes
Free Cash Flow to Equity it shows
First we start with net income clear
Add back depreciation year by year
Subtract the capex that they spend
On working capital changes blend
[Chorus]
FCFE, cash for equity
After all the debts are paid you see
FCFE, what shareholders receive
The money that they can believe
Free to equity, free to equity
This is how we value what it's worth to be
An owner of the company
[Verse 2]
Take the net borrowing add it in
When debt increases cash flows begin
But if they pay down what they owe
Subtract that from the total flow
It's different from FCFF you know
That one's for all investors so
But FCFE is just for shares
The cash that equity holders bear
[Chorus]
FCFE, cash for equity
After all the debts are paid you see
FCFE, what shareholders receive
The money that they can believe
Free to equity, free to equity
This is how we value what it's worth to be
An owner of the company
[Bridge]
Net income plus depreciation
Minus capex calculation
Minus working capital change
Plus net borrowing rearrange
Equals FCFE that's the key
For equity valuation free
[Chorus]
FCFE, cash for equity
After all the debts are paid you see
FCFE, what shareholders receive
The money that they can believe
Free to equity, free to equity
This is how we value what it's worth to be
An owner of the company
[Outro]
When you're valuing equity stakes
FCFE is what it takes
The cash that's truly free to flow
To shareholders below
11. Cash Flow Quality Assessment
[Verse 1]
Sarah's looking at the quarterly report tonight
Numbers on the page but something doesn't feel right
Cash from operations should be strong and true
But she's seeing warning signs in what the company's been through
[Pre-Chorus]
Is the money real or just accounting tricks
Time to dig deeper with analytics
[Chorus]
Quality cash flows, that's what we seek
Strong and sustainable, not artificially tweaked
Red flags waving when the patterns don't align
Green lights shining when the trends look fine
Operating cash should match the net income line
Quality assessment keeps your analysis refined
[Verse 2]
First she checks if operating cash is growing steady
Matching up with earnings, is the foundation ready
Days sales outstanding getting longer every year
That's a red flag signal ringing loud and clear
[Pre-Chorus]
Customers paying slower, cash gets tight
Warning bells are flashing bright
[Chorus]
Quality cash flows, that's what we seek
Strong and sustainable, not artificially tweaked
Red flags waving when the patterns don't align
Green lights shining when the trends look fine
Operating cash should match the net income line
Quality assessment keeps your analysis refined
[Bridge]
Inventory building up without demand
Working capital changes getting out of hand
One-time gains disguising operational pain
Seasonal patterns or permanent strain
[Verse 3]
Positive signs include consistent cash generation
Operating flows funding growth across the nation
Free cash flow positive year after year
Conservative accounting keeps the picture clear
[Final Chorus]
Quality cash flows, that's what we seek
Strong and sustainable, not artificially tweaked
Red flags waving when the patterns don't align
Green lights shining when the trends look fine
Operating cash should match the net income line
Quality assessment keeps your analysis refined
[Outro]
Cash flow quality, the analyst's best friend
Separating truth from numbers that pretend
12. Cash Flow Manipulations and Red Flags
[Verse 1]
Companies play games with their cash flow reports
Moving money around like financial sports
Classification shifting makes it look so bright
Operating cash when it should be financing, right?
They take investing outflows and make them disappear
Into operating buckets to fool what you hear
[Chorus]
Watch for the red flags flying high
S-P-C will help you spy
Stretching payables, pushing dates
Classification that manipulates
Capitalizing what should expense
These tricks don't make financial sense
Red flags, red flags, don't be blind
S-P-C will blow your mind
[Verse 2]
Stretching payables is their favorite game
Pay suppliers later but the cash looks the same
This quarter's flow gets an artificial boost
But next quarter's numbers will come home to roost
Days payable outstanding starts to climb
A temporary trick that works just one time
[Chorus]
Watch for the red flags flying high
S-P-C will help you spy
Stretching payables, pushing dates
Classification that manipulates
Capitalizing what should expense
These tricks don't make financial sense
Red flags, red flags, don't be blind
S-P-C will blow your mind
[Bridge]
Capitalizing costs that should be expensed today
Makes operating cash flow look okay
Software development, maintenance fees
Put on the balance sheet like factory machinery
But these costs should hit the income right now
Don't let sneaky accounting make you bow
[Verse 3]
How to spot these games before you invest?
Compare the patterns and put them to the test
Operating cash flow growing way too fast
While net income struggles to match the past
Days payable rising without explanation
Cash flow quality needs investigation
[Chorus]
Watch for the red flags flying high
S-P-C will help you spy
Stretching payables, pushing dates
Classification that manipulates
Capitalizing what should expense
These tricks don't make financial sense
Red flags, red flags, don't be blind
S-P-C will save your dime
[Outro]
Remember S-P-C when reading statements
Stretching, pushing, capitalizing placements
Quality cash flow tells the real story
Don't get fooled by accounting glory
13. Introduction to Financial Ratios
[Verse 1]
When you look at numbers on a company's page
Balance sheet and income can seem like a maze
But ratios reveal what the data won't say
They're relationships that guide us on our way
Take two numbers, divide one by the other
Compare the company to its industry brothers
[Chorus]
Financial ratios tell the story true
LAMP lights the way for me and you
Liquidity shows the cash they hold
Activity turns assets into gold
Market ratios show the stock's appeal
Profitability makes the margins real
Four categories, one clear view
Financial ratios tell the story true
[Verse 2]
Every ratio serves a purpose and a need
Comparing companies or tracking how they succeed
Current versus past or firm against the rest
These mathematical tools help determine what's best
Raw numbers lie alone upon the sheet
But ratios make the analysis complete
[Chorus]
Financial ratios tell the story true
LAMP lights the way for me and you
Liquidity shows the cash they hold
Activity turns assets into gold
Market ratios show the stock's appeal
Profitability makes the margins real
Four categories, one clear view
Financial ratios tell the story true
[Bridge]
From quick ratios to return on equity
From debt to asset turns, they set the story free
No single number tells you all you need
But patterns in the ratios help you read
The health and wealth and future of the firm
These simple fractions help the story turn
[Chorus]
Financial ratios tell the story true
LAMP lights the way for me and you
Liquidity shows the cash they hold
Activity turns assets into gold
Market ratios show the stock's appeal
Profitability makes the margins real
Four categories, one clear view
Financial ratios tell the story true
[Outro]
When balance sheets seem complex and unclear
Let ratios make the company's path appear
LAMP will guide your analysis tonight
Financial ratios bring the numbers to light
14. Liquidity Ratios
[Verse 1]
When bills are due and cash runs tight
Companies need funds to make it right
Short-term debts are knocking at the door
Liquidity ratios tell us more
Current assets versus current debts
Shows us if the company's all set
Can they pay what's due within the year
These three ratios make it crystal clear
[Chorus]
Current, quick, and cash - the liquidity three
Measuring how well companies stay debt-free
Current includes all, quick drops inventory
Cash is most strict, tells the truest story
Divide by current liabilities, that's the key
Higher numbers mean more liquidity
[Verse 2]
Current ratio takes everything in sight
Current assets make the numerator bright
Inventory, cash, and receivables too
Divided by debts that are coming due
If it's two to one, that sounds pretty good
Company can pay like a business should
But sometimes inventory's hard to sell
So the quick ratio tells a story to tell
[Chorus]
Current, quick, and cash - the liquidity three
Measuring how well companies stay debt-free
Current includes all, quick drops inventory
Cash is most strict, tells the truest story
Divide by current liabilities, that's the key
Higher numbers mean more liquidity
[Bridge]
Quick ratio strips away the stock on shelves
Cash and receivables can help themselves
Most liquid assets are what we count
When immediate payment's paramount
Cash ratio is the strictest test of all
Only cash and equivalents stand tall
When creditors come calling at your door
This ratio shows what you're prepared for
[Verse 3]
Each ratio tells a different tale
About the company's financial trail
Current shows the broadest liquidity view
Quick shows what's more easily turned to cash too
Cash ratio's conservative but tells no lies
Only the most liquid will suffice
Together they paint a picture clear
Of short-term financial health each year
[Chorus]
Current, quick, and cash - the liquidity three
Measuring how well companies stay debt-free
Current includes all, quick drops inventory
Cash is most strict, tells the truest story
Divide by current liabilities, that's the key
Higher numbers mean more liquidity
[Outro]
When you analyze a company's might
These liquidity ratios shed the light
Can they pay their bills when they're due
These three ratios will see them through
15. Activity Ratios
[Verse 1]
Every company has assets on their books today
Inventory sitting, customers who need to pay
But having stuff ain't enough to make your business strong
You gotta turn those assets fast to keep the cash flow on
The question that the analysts are asking every year
How well do you convert your assets into revenue here
Three ratios will tell the tale of efficiency and speed
Let's break them down so you can learn just what investors need
[Chorus]
Turn it over, turn it over, that's the key to understand
Inventory turnover shows how fast you move your hand
Receivables are spinning when your customers pay fast
Asset turnover total tells you if your sales will last
Higher numbers, faster turning, efficiency is king
Activity ratios tell you everything
[Verse 2]
Inventory turnover takes your cost of goods and sales
Divide by average inventory, that's how this ratio scales
If you're moving products quickly, this number will be high
But if your stock is sitting still, your turnover's gonna die
Calculate it simply: cost of sales on top
Average inventory below, now watch your pencil drop
A grocery store might turn it fifty times within a year
While heavy equipment companies might turn it twice, that's clear
[Chorus]
Turn it over, turn it over, that's the key to understand
Inventory turnover shows how fast you move your hand
Receivables are spinning when your customers pay fast
Asset turnover total tells you if your sales will last
Higher numbers, faster turning, efficiency is king
Activity ratios tell you everything
[Verse 3]
Receivables turnover measures credit sales you make
Divided by accounts receivable, for analysis sake
When customers pay quickly, this ratio climbs up high
When payment terms are longer, you'll see this number fly down low
Days sales outstanding flips this ratio around
Three-sixty-five divided by turnover, wisdom found
Thirty days means customers pay fast and cash flows free
Ninety days means longer waits for your money to be
[Bridge]
Asset turnover total takes your revenue for the year
Divided by total assets, the big picture becomes clear
How well you use everything to generate your sales
When this ratio's climbing up, your efficiency never fails
Some industries are heavy with equipment, land, and more
Their asset turnover's lower but that's normal to the core
While service companies are light, their ratios run high
Compare within your industry to see who's flying by
[Chorus]
Turn it over, turn it over, that's the key to understand
Inventory turnover shows how fast you move your hand
Receivables are spinning when your customers pay fast
Asset turnover total tells you if your sales will last
Higher numbers, faster turning, efficiency is king
Activity ratios tell you everything
16. Solvency Ratios
[Verse 1]
When companies need money to grow and expand
They can borrow from banks or take investors' hands
But how much debt is too much to bear
That's where solvency ratios help us prepare
We look at the balance sheet, assets and debts
To see if this company's making safe bets
Long-term stability is what we seek
These ratios tell us if finances are weak
[Chorus]
Debt to equity, interest coverage too
Debt ratios show us what companies can do
Can they pay their bills when times get rough
Solvency ratios tell us if they're strong enough
Remember the three, they work as a team
D-E-I, debt equity interest supreme
Check the coverage, check the load
Solvency ratios crack the code
[Verse 2]
Debt to equity is the first one we'll learn
Total debt divided by equity earned
If the number's high, there's cause for concern
Too much borrowing makes investors turn
Point five or lower is generally good
Higher than one means they've borrowed more than they should
Shareholders' equity versus what they owe
This ratio helps us understand cash flow
[Chorus]
Debt to equity, interest coverage too
Debt ratios show us what companies can do
Can they pay their bills when times get rough
Solvency ratios tell us if they're strong enough
Remember the three, they work as a team
D-E-I, debt equity interest supreme
Check the coverage, check the load
Solvency ratios crack the code
[Verse 3]
Interest coverage ratio comes up next
EBIT divided by interest expense
Can they pay the interest on their debt
Higher numbers mean less financial threat
Five times or more is what we like to see
Lower than two-point-five makes analysts flee
Earnings before interest and taxes on top
If this ratio's low, their payments might stop
[Bridge]
Total debt ratio rounds out our three
Total debt divided by assets, you see
Point four or less keeps companies sound
Higher than point six, red flags are found
These ratios together paint the whole scene
Financial stability, living the dream
Or warning us when trouble's in sight
Solvency analysis keeps investments right
[Chorus]
Debt to equity, interest coverage too
Debt ratios show us what companies can do
Can they pay their bills when times get rough
Solvency ratios tell us if they're strong enough
Remember the three, they work as a team
D-E-I, debt equity interest supreme
Check the coverage, check the load
Solvency ratios crack the code
[Outro]
So when you're analyzing stocks to buy
Let solvency ratios be your guide
Long-term success needs financial health
These ratios protect your investing wealth
17. Profitability Ratios
[Verse 1]
When a company sells its goods and wares
The first thing that we need to compare
Is revenue minus what it cost to make
That's gross profit, make no mistake
Take that number, divide by sales
This gross margin never fails
To show us if the business model's sound
Before other costs come around
[Chorus]
G-O-A-N-R, five ratios to take you far
Gross and Operating, Asset, Net, Return on Equity star
G-O-A-N-R, measuring profit near and far
These margins tell the story of how profitable you are
[Verse 2]
Operating margin digs a little deeper
Subtracts the costs that make accountants weeper
Salaries, rent, and marketing too
From gross profit, what comes through?
Divide by revenue, you'll see
How efficient operations can be
Before the interest and taxes hit
This ratio shows management's wit
[Chorus]
G-O-A-N-R, five ratios to take you far
Gross and Operating, Asset, Net, Return on Equity star
G-O-A-N-R, measuring profit near and far
These margins tell the story of how profitable you are
[Verse 3]
Net margin is the bottom line
After everything, what profit's mine?
Interest paid and taxes due
Net income is what filters through
Divide by sales to get the rate
This final margin seals your fate
It shows what shareholders really earn
From every dollar, what returns
[Bridge]
But wait, there's more to analyze
Return on Assets, what a prize
Net income over total assets held
Shows how well resources are compelled
ROE's the king of ratios true
Net income over equity's due
These five together paint the scene
Of profit power, clear and clean
[Chorus]
G-O-A-N-R, five ratios to take you far
Gross and Operating, Asset, Net, Return on Equity star
G-O-A-N-R, measuring profit near and far
These margins tell the story of how profitable you are
[Outro]
From sales to assets, equity too
These ratios will see you through
Profitability's crystal clear
With G-O-A-N-R always near
18. Valuation Ratios
[Verse 1]
When you're looking at a stock to buy
Three magic numbers help you decide
Price to earnings shows how much you pay
For every dollar that the company makes each day
[Chorus]
P-E, P-B, P-S - these three will set you free
Price to earnings, price to book, price to sales you see
Divide the stock price by the number that you need
Valuation ratios help you plant the perfect seed
[Verse 2]
Price to book compares what shares cost today
To the company's net worth shown their balance sheet way
Take the assets minus debts, that's book value true
Divide stock price by book - now what ratio do you view?
[Chorus]
P-E, P-B, P-S - these three will set you free
Price to earnings, price to book, price to sales you see
Divide the stock price by the number that you need
Valuation ratios help you plant the perfect seed
[Verse 3]
Price to sales takes revenue into account
Divide stock price by sales per share amount
When earnings swing or losses make P-E unclear
P-S ratio keeps your analysis sincere
[Bridge]
Lower ratios might mean bargains wait
Higher ratios could mean overpriced fate
Compare to industry peers and historical trends
Smart valuation is where good investing begins
[Chorus]
P-E, P-B, P-S - these three will set you free
Price to earnings, price to book, price to sales you see
Divide the stock price by the number that you need
Valuation ratios help you plant the perfect seed
[Outro]
Three simple ratios, memorize with ease
Fair value hidden in these golden keys
19. Common-Size Analysis
[Verse 1]
When you've got financial statements from different companies
Different sizes make it hard to see what's really happening
Amazon's millions versus smaller firms with thousands
How do you compare when numbers are so different?
[Chorus]
Common-size analysis, break it down to percentages
Vertical shows the parts, horizontal shows the changes
Every line becomes a piece of one hundred percent
Now you can compare and see where money's really spent
Common-size, standardize, make the numbers talk
Common-size, analyze, now your data walks the walk
[Verse 2]
Vertical analysis takes each line item on the sheet
Divides by total revenue or assets, makes it neat
If cost of goods is forty percent of sales today
You'll see it clearly marked in this percentage way
[Chorus]
Common-size analysis, break it down to percentages
Vertical shows the parts, horizontal shows the changes
Every line becomes a piece of one hundred percent
Now you can compare and see where money's really spent
Common-size, standardize, make the numbers talk
Common-size, analyze, now your data walks the walk
[Verse 3]
Horizontal analysis looks across the years
Takes the base year as one hundred, makes trends crystal clear
If revenue grew from ten million to fifteen
That's fifty percent growth, now the pattern can be seen
[Bridge]
No more guessing which company's performing best
Percentages reveal what raw numbers never expressed
Industry benchmarks become easy to compare
When everything's standardized, insights are everywhere
[Chorus]
Common-size analysis, break it down to percentages
Vertical shows the parts, horizontal shows the changes
Every line becomes a piece of one hundred percent
Now you can compare and see where money's really spent
Common-size, standardize, make the numbers talk
Common-size, analyze, now your data walks the walk
[Outro]
From balance sheet to income statement too
Common-size analysis works for you
Turn those numbers into percentages
Make financial comparison advantages
20. DuPont Analysis Framework
[Verse 1]
When you want to see how well a company can grow
There's a magic number that will help you know
Return on equity tells the story clear
But DuPont breaks it down so you can hear
Three little pieces make the bigger whole
Each one plays its own important role
[Chorus]
Profit margin times asset turnover
Times equity multiplier takes you over
P-A-E remember these three
They unlock ROE's mystery
Profit margin times asset turnover
Times equity multiplier shows you how they're doing overall
[Verse 2]
First component is the profit margin game
How much profit from each dollar of sales they claim
Net income divided by revenue
Shows efficiency in what they do
Higher margins mean they keep more cash
From every sale without a dash
[Chorus]
Profit margin times asset turnover
Times equity multiplier takes you over
P-A-E remember these three
They unlock ROE's mystery
Profit margin times asset turnover
Times equity multiplier shows you how they're doing overall
[Verse 3]
Asset turnover is component number two
Revenue over assets shows what they can do
How efficiently they use what they own
To generate sales and profits grown
Higher turnover means they're working smart
With every asset playing its part
[Bridge]
Equity multiplier rounds out our song
Assets over equity keeps us strong
Shows how much leverage they employ
Financial risk they might enjoy
Higher numbers mean more debt
But also returns they might get
[Chorus]
Profit margin times asset turnover
Times equity multiplier takes you over
P-A-E remember these three
They unlock ROE's mystery
Profit margin times asset turnover
Times equity multiplier shows you how they're doing overall
[Outro]
DuPont analysis breaks it down
From confusion to clarity found
Three components tell the tale
Of how companies succeed or fail
ROE equals P-A-E
Now you've got the master key
21. Comparative Analysis Methods
[Verse 1]
When you want to understand how companies compare
Look across the industry with analytical care
Cross-sectional analysis shows you who's ahead
Compare the ratios and metrics, see where each is led
PE ratios, debt to equity, margins side by side
Revenue growth and ROE become your trusty guide
Same time period, different firms within the space
Cross-sectional reveals who's winning in the race
[Chorus]
Cross and time, cross and time
Two methods that help your analysis shine
Cross-sectional shows who leads the pack
Time-series tracks performance looking back
Cross and time, cross and time
Compare across, then track the line
[Verse 2]
Time-series analysis takes a different view
One company's journey, see what trends are true
Multiple periods lined up in a row
Watch the patterns emerge and see which way they go
Quarter by quarter or year after year
Financial performance becomes crystal clear
Rising or falling, the trend will reveal
If management's promises are actually real
[Chorus]
Cross and time, cross and time
Two methods that help your analysis shine
Cross-sectional shows who leads the pack
Time-series tracks performance looking back
Cross and time, cross and time
Compare across, then track the line
[Bridge]
Snapshot versus movie, both tell different tales
One shows the rankings, one shows what prevails
Industry benchmarks meet historical trends
Smart analysts use both to see where it all ends
[Verse 3]
Combine them together for the fullest view
Cross-sectional ranking plus the trends that are true
Is the leader consistent or just having luck?
Is the laggard improving or completely stuck?
Context is everything in financial review
Both methods together give perspective that's true
The complete picture needs both tools in your kit
Cross-sectional and time-series make the puzzle fit
[Chorus]
Cross and time, cross and time
Two methods that help your analysis shine
Cross-sectional shows who leads the pack
Time-series tracks performance looking back
Cross and time, cross and time
Compare across, then track the line
[Outro]
When CFA questions ask you to compare
Remember both methods and you'll get there
Cross-sectional, time-series, now you know the way
Comparative analysis saves the day
22. Financial Forecasting and Pro-Forma Statements
[Verse 1]
Starting with the numbers from the past three years
Income statements, balance sheets, make the picture clear
Revenue growth patterns and expense trend lines
Historical data becomes our guide to future signs
Take the sales we've recorded, find the average rate
Monthly seasonality helps us calculate
[Chorus]
Forecast forward, project ahead
Pro-forma statements, that's what we said
Income, balance, cash flow too
F-O-R-E-C-A-S-T, that's what we do
Historical trends plus assumptions new
Building tomorrow from what we knew
[Verse 2]
Income statement first, let's project the sales
Using growth percentages, following the trails
Cost of goods sold moves with revenue
Fixed costs stay stable, variable costs grew
Operating expenses, interest, and tax
Pro-forma income shows where profit tracks
[Chorus]
Forecast forward, project ahead
Pro-forma statements, that's what we said
Income, balance, cash flow too
F-O-R-E-C-A-S-T, that's what we do
Historical trends plus assumptions new
Building tomorrow from what we knew
[Verse 3]
Balance sheet projection needs a careful hand
Assets, liabilities, equity planned
Working capital ratios from the past
Help us estimate what inventory lasts
Accounts receivable days and payable terms
Cash requirements, that's what we learn
[Bridge]
Sensitivity analysis, change one thing
See how different assumptions make numbers swing
Best case, worst case, most likely scene
Pro-forma helps us see what future might bring
[Chorus]
Forecast forward, project ahead
Pro-forma statements, that's what we said
Income, balance, cash flow too
F-O-R-E-C-A-S-T, that's what we do
Historical trends plus assumptions new
Building tomorrow from what we knew
[Outro]
Cash flow statement ties it all together
Operating, investing, financing weather
Free cash flow projection shows the health
Pro-forma forecasting builds financial wealth
23. Segment Reporting Analysis
[Verse 1]
When companies grow big and wide
They split their business side by side
Different products, different lands
Need separate books to understand
The CFO must break it down
Show where the profits can be found
[Chorus]
Segment by segment, piece by piece
Business and geographic release
Revenue, profit, assets too
Break it down for me and you
Segment by segment, clear and bright
Shows us where the future's right
[Verse 2]
Business segments tell the tale
Which products win and which ones fail
Technology or retail stores
Each division keeps its scores
Operating income on display
Shows which units lead the way
[Chorus]
Segment by segment, piece by piece
Business and geographic release
Revenue, profit, assets too
Break it down for me and you
Segment by segment, clear and bright
Shows us where the future's right
[Verse 3]
Geographic tells us where
Asia, Europe, everywhere
Which countries bring the highest gain
Which markets cause the company pain
Currency and local trends
On location it depends
[Bridge]
Ten percent rule applies
If segments comprise
Revenue or assets or results
Then disclosure it results
IFRS and GAAP agree
Transparency is the key
[Chorus]
Segment by segment, piece by piece
Business and geographic release
Revenue, profit, assets too
Break it down for me and you
Segment by segment, clear and bright
Shows us where the future's right
[Outro]
Read the footnotes, check the chart
Segment analysis is art
Business lines and regions wide
Help investors see inside
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