3) Business Analysis Flashcards
what are the four decisions in the business cycle?
financing
investing
operating
distribution
what do all the decisions in the cycle look at?
maximizing value as it is most important to the company
what is the objective of business operations?
to generate value
how can we maximize value?
by generating a return which exceeds the cost of capital
what does financial analysis do?
interprets FS to see how value is created and interprets them in a meaningful way
who do we do financial analysis for?
external stakeholders who use the FS to evaluate comp health and financial performance
what do internal constituents use FS for?
use it as a monitoring tool to see if comp is managing finances and meet its objectives
what is Du Pont analysis good for?
helps us see what the issues are within the company / gives direction for what we should be looking at / company performance
three metrics in Du Pont?
- operating margin
- asset efficiency
- leverage
ROE formula?
NP/sales x sales/assets x assets/equity = NP/equity
what is comparative FS analysis?
direct comparison of current statements to numerous prior year statements to detect any trends
what is index analysis?
- comparing FS figures using a base year
- helps with removing size to distort view.
what is common size analysis?
uses something common for every line item and usually uses total sales (everything shown as % of sales)
relationship between debt and leverage?
more debt = more leverage = can lever their returns upwards - more risk, more return
debt ratio?
total debt / total assets
times interest earned?
PBIT or CGFO / interest expense
gross margin?
gross profit / sales
operating margin?
op profit / sales
net margin?
net profit / sales
return on assets/equity?
net profit / av total assets or equity
which companies are profitability ratios good for?
high volume companies – small changes in margin = big diff
inventory turnover ratio?
av inv / COS x 365 days
average collection period ratio?
av accs receivable / credit sales x 365
settlement period ratio?
av accs payable / COS x 365
operating cycle?
inventory turnover + average collection period - settlement period
(must be positive; are we getting money back in time to pay our creditors)
* important for retail
fixed asset turnover ratio?
sales / av fixed assets
total asset turnover ratio?
revenue / av total assets
cash conversion ratio?
CGFO (excl dividends paid) / NP after tax
(close to 1 as possible)
free cash flow ratio?
CGFO - inv to maintain ops
price earnings ratio?
share price / EPS
earnings yield ratio?
EPS / share price
earnings per share formula?
NP / no of shares in issue
dividend yield ratio?
div per share / share price x 100
- typically 2-3% for listed company
dividend cover ratio?
EPS / divs per share
limitations of ratio analysis?
- creative accounting
- non-standard acc policies
- inflation
what happens for 5) projection?
after analysing / interpreting:
- provide useful info
- project going forward, make decisions
what is a loan covenant?
company gets loan which restricts how low its d/e ratio can be; too low = breach = immediate upfront payment required
limitations of business analysis?
- diversified firms hard to compare
- subjectivity / judgment
- seasonality / timing
- insufficient info
- inflation
which specific external individuals is FS analysis relevant to?
- equity investors
- creditors
- merger analysts
- auditors
- tax authorities
which specific internal individuals is FS analysis relevant to?
- mgmt
- employees
which ratios look at risk?
- liquidity
- leverage
which ratios look at return?
- profitability
- efficiency
- cash flow
- market
what are the liquidity ratios?
- acid test
- current
what are the leverage ratios?
- debt / debt-equity
- times interest earned
what are the profitability ratios?
- margins (gross, op, net)
- return on A/E
what are the asset efficiency ratios?
- operating cycle ratios
- asset turnover
what are the market ratios?
- dividends ratios
- earnings ratios
