Financial Statement School: Recent Comments

Comment on Return on Assets or "ROA"

2011-09-23T20:02:50Z

Another way to look at ROA is to use earnings before interest after tax (or “EBIAT”) in the numerator. The effect of this change is to remove the effect of leverage (or more precisely the effect of interest expense) on the ratio. You might do this to create a measurement that includes all resources available to both debt and equity-holders.

Comment on Price/Earnings or “P/E” Ratio

2011-03-27T00:34:37Z

Also, keep in mind that, since EPS is affected by the capital structure of a company, so is the P/E ratio. It is not appropriate to compare P/E ratios of companies with different degrees of leverage.

Comment on Earnings per Share or “EPS”

2011-03-27T00:31:11Z

EPS is not comparable among multiple firms unless those firms have similar capital structures, because changes or differences in leverage affect EPS all else being equal.

Comment on Straight Line Depreciation

2010-11-22T00:30:47Z

Here is an example. Let's say that you buy a vehicle for $20,000. You believe that the useful life of this vehicle is five years, and you assume that you can sell it for $5,000 at the end of its useful life. The annual straight line depreciation is, therefore, $3,000 or (20,000-5,000)/5. The monthly straight line depreciation would be $250 or (20,000-5,000)/(12*5).

Comment on Profitability, Efficiency, and Operating Ratios

2010-11-22T00:28:01Z

Return on Sales is another measure of profitability and efficiency. Return on sales is similar to net profit margin except that interest and taxes are added back to the numerator:

Return on Sales = Net Income before interest and income taxes
Net Revenue

Comment on Cap Rate from the Appraiser's Perspective

2010-08-31T17:58:23Z

I personally like the cap rate return calculation because it allows investors measure the earning ability of an investment. Your post gives an a different angle on how to employ it further.

Good post

Comment on Cash Basis versus Accrual Basis Accounting

2010-06-30T18:15:22Z

Nice overview of these differences between cash and accrual. One easy way to see corporate financial statements translated into "cash basis" is by looking at the statement of cash flows. It may not be exactly a cash basis financial statement but conceptually it helps you achieve your objectives.

Comment on Balance Sheet

2010-06-28T01:23:46Z

Here is an interesting balance sheet explanation and example:
http://www.accountingelf.com/how-to-read-a-balance-sheet/

Comment on Senior Debt to Tangible Net Worth Ratio

2010-05-19T13:57:21Z

A debt equity ratio of 1 might be regarded as middle-strong, but a debt/equity ratio of 8 is precarious.

Comment on Return on Assets or "ROA"

2010-04-17T17:02:21Z

If the period of time over which you are measuring the ROA is characterized by significant asset growth with return on those assets anticipated in future periods, then the ROA may turn out to be less than you would expect. For example, a company that is growing its inventory for future sales may have a relatively lower ROA.