2016 CFA® EXAM REVIEW COVERS ALL TOPICS IN LEVEL I LEVEL I CFAư đ FORMULA SHEETS Copyright â 2016 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Financial Analysis Techniques Financial Analysis Techniques Inventory Turnover Inventory turnover = Cost of goods sold Average inventory Days of Inventory on Hand Days of inventory on hand (DOH) = 365 Inventory turnover Receivables Turnover Receivables turnover = Revenue Average receivables Days of Sales Outstanding Days of sales outstanding (DSO) = 365 Receivables turnover Payables Turnover Payables turnover = Purchases Average trade payables Number of Days of Payables Number of days of payables = 365 Payables turnover Working Capital Turnover Working capital turnover = Revenue Average working capital Fixed Asset Turnover Fixed asset turnover = Revenue Average fixed assets Total Asset Turnover Total asset turnover = 46 Revenue Average total assets © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Financial Analysis Techniques Current Ratio Current ratio = Current assets Current liabilities Quick Ratio Quick ratio = Cash + Short-term marketable investments + Receivables Current liabilities Cash Ratio Cash ratio = Cash + Short-term marketable investments Current liabilities Defensive Interval Ratio Defensive interval ratio = Cash + Short-term marketable investments + Receivables Daily cash expenditures Cash Conversion Cycle Cash conversion cycle = DSO + DOH − Number of days of payables Debt‐to‐Assets Ratio Debt -to-assets ratio = Total debt Total assets Debt‐to‐Capital Ratio Debt -to-capital ratio = Total debt Total debt + Shareholders’ equity Debt‐to‐Equity Ratio Debt -to-equity ratio = Total debt Shareholders’ equity Financial Leverage Ratio Financial leverage ratio = Average total assets Average total equity Interest Coverage Ratio Interest coverage ratio = EBIT Interest payments © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright 47 Financial Analysis Techniques Fixed Charge Coverage Ratio Fixed charge coverage ratio = EBIT + Lease payments Interest payments + Lease payments Gross Profit Margin Gross profit margin = Gross profit Revenue Operating Profit Margin Operating profit margin = Operating profit Revenue Pretax Margin Pretax margin = EBT (earnings before tax, but after interest) Revenue Net Profit Margin Net profit margin = Net profit Revenue Return on Assets ROA = Net income Average total assets Adjusted ROA = Net income + Interest expense (1 − Tax rate) Average total assets Operating ROA = Operating income or EBIT Average total assets Return on Total Capital Return on total capital = EBIT Short-term debt + Long-term debt + Equity Return on Equity Return on equity = Net income Average total equity Return on Common Equity Return on common equity = 48 Net income − Preferred dividends Average common equity © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Financial Analysis Techniques DuPont Decomposition of ROE Net income Average shareholders’ equity ROE = 2‐Way Dupont Decomposition Net income Average total assets × Average total assets Average shareholders’ equity ROE = ↓ ↓ ROA Leverage 3‐Way Dupont Decomposition Net income Average total assets Revenue × × Revenue Average total assets Average shareholders’ equity ROE = ↓ ↓ Net profit margin ↓ Asset turnover Leverage 5‐Way Dupont Decomposition ROE = Interest burden Asset turnover ↓ ↓ Net income EBT Average total assets EBIT Revenue × × × × EBT EBIT Revenue Average total assets Avg shareholders’ equity ↓ ↓ ↓ Tax burden EBIT margin Leverage Price‐to‐Earnings Ratio P /E = Price per share Earnings per share Price to Cash Flow P /CE = Price per share Cash flow per share Price to Sales P /S = Price per share Sales per share Price to Book Value P /BV = Price per share Book value per share © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright 49 ... addressed to the Permissions Department, John Wiley & Sons, Inc., 11 1 River Street, Hoboken, NJ 07030, (2 01) 748-6 011 , fax (2 01) 748-6008, or online at http://www.wiley.com/go/permissions Limit... mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 10 7 or 10 8 of the 19 76 United States Copyright Act, without either the prior written permission of the Publisher,... Department within the United States at (800) 762-2974, outside the United States at ( 317 ) 572-3993 or fax ( 317 ) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand