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CISI Securities > 8.2 Financial Statement analysis > Flashcards

8.2 Financial Statement analysis Flashcards

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SIE Exam flashcards
1
Q

EPS

A

Profit available to ordinary shareholders/number of ordinary shares

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2
Q

What is diluted EPS

A

EPS that considers all potentially dilutive instruments in the number of ordinary shares

eg
- Convertible preference shares
- Convertible bonds
- Warrants

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3
Q

Historic P/E ratio

A

Market price per shares/ EPS

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4
Q

What is trailing P/E ratio

A

Ignore one-off events such as windfalls or exceptional items

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5
Q

What is prospective P/E ratio

A

Uses current financial year forecast

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6
Q

EV/EBITDA

A

EV/EBITDA

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7
Q

EV

A

market value of debt+ market value of equity

enterprise value is cost of buying whole company

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8
Q

EBITDA

A

EBIT (operating profit) + depreciation+ amortization

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9
Q

What is capital structure

A

Proportion of debt and equity

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10
Q

Gross dividend yield

A

Dividend per share/ market price per share *100

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11
Q

Gross dividend cover

A

earnings per share/ dividend per share

If less than 1 its an uncovered dividend meaning dividend is more than earnings so they prob used reserves to pay

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12
Q

debt/equity ratio

A

Interest bearing debt (inc pref shares and overdraft) / equity shareholder funds *100

Higher % means more highly geared

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13
Q

What is net debt to equity

A

Removes cash and short term investments which could be used to repay debt

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14
Q

What does high gearing mean

A
  • More highly geared means less likely to borrow more
  • More volatile profits
  • exposes shareholder to reduced income as debt payments obligatory by dividends discretionary
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15
Q

What are the financial gearing ratios

A

Debt/equity ratio and interest cover

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16
Q

Interest cover ratio

A

Tells how easily company can pay interest expenses on outstanding debt

Profit before interest and tax (operating profit)/ interest expense

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17
Q

What are the liquidity ratios

A

Current and quick ratio. Tells how able is company to meet liabilities in next 12 months

18
Q

Current ratio

A

Current assets (Inventory,receivables,cash)

/

Current liabilities

19
Q

Quick ratio

A

(Current assets- inventory)/ current liabilities

or

(receivables+ cash)/ current liabilities

20
Q

What are operating/profitability ratios

A

Return On Capital Employed (ROCE)

Return On Equity (ROE)

Profit Margin

21
Q

What is return on assets

A

same as ROCE

22
Q

List all equations for assets and liabilities (4)

A

Total assets= Equity+ Liability

Non current assets+ current assets= Capital + Reserves + Liabilities

Equity = Captial + Reserves

Capital Employed= Total assets - Current liabilities

23
Q

Return on capital employed

A

operating profit/ capital employed *100

24
Q

Return on equity

A

Net Income (PAT)/ Shareholders equity *100

25
Q

Profit margin formula and what it tells you

A

What % of revenue becomes profit

= Profit/Revenue as %

Higher % means more efficient at turning revenue into profit

26
Q

Gross profit margin

A

% of revenue company converts to profit after considering COST OF SALES

27
Q

Operating profit margin

A

% of revenue company converts to profit after considering COST OF SALES AND OTHER OPERATING COSTS

28
Q

Capital employed

A

Total assets - current liabilities

29
Q

If a company undergoes a stock split, which of the following will have to be restated?

A

Net asset value per share

No new money is raised by the company during a share split. As a result, there is no effect on the gearing ratio or net assets. As net asset value per share equals total net assets divided by the number of shares, a share split will have the effect of REDUCING this ratio. Note: leverage is the US term for gearing.

30
Q

Which of the following would explain why an investor wishes to use a net total return index rather than a price return index?

A

They wish to factor in the effects of dividend reinvestment

Price return, which measures the price performance and, therefore, disregards income from dividends. Total return, which measures the performance of both price return and dividend reinvestment. Net total return, which accounts for dividend reinvestment after the deduction of a withholding tax.

Although tax is a factor, the most significant factor will be the recognition of the payment and reinvestment of dividends.

31
Q

If a company has high interest cover on unsecured loan stock which it has recently issued, what is the consequence of this?

A

Improved market rating

32
Q

The best definition of earnings per share is:

A

Profit after tax minus preference dividend divided by shares outstanding

33
Q

If an investor holds one share in a company that subsequently undertakes a 4:1 bonus issue, they would have to multiply EPS by:

A

0.20

34
Q

An uncovered dividend is one paid out of:

A

Retained earnings

35
Q

Four shares have the following share prices and EPS. Which is the most highly-rated in relation to growth?

A

Highest rated is one with highest P/E ratio

36
Q

A company has net assets of £30 million, long-term debts of £10 million and current liabilities of £5 million. The gross profit, operating profit and profit after tax are £5 million, £4 million and £2 million, respectively. What is the return on capital employed (ROCE)?

A

The ROCE is calculated as operating profit divided by total capital employed. Total capital employed includes shareholders’ equity and non-current liabilities, but not current liabilities. Net assets, which equal the shareholders’ equity by definition, are £30 million. We add the £10 million in long-term debt to find capital employed equals £40 million.
The ROCE is then calculated as operating profit of £4 million divided by capital employed of £40 million, which equals 10%.

37
Q

Which of the following is most likely to cause an increase in interest coverage?

A

Switching to depreciate an asset over ten years rather than just five years

Interest coverage is EBIT/interest payable.
Depreciating an asset over ten years will lower the depreciation charge, increase EBIT and so increase the interest coverage ratio

Depreciation accounted for in EBIT

38
Q

A company undertakes a 2:3 scrip issue. To correctly restate the previously reported EPS figure, multiply it by:

A

3/5

39
Q

The shares of a plc stand at a 50% premium to net asset value per share. The company has 100m shares and the share price is 220p. What are the net assets?

A

If share price is at a 50% premium to net asset value, then net asset value must be 100 / 150 (or 2 / 3) of share the price.
220p x 2 / 3 = 146.7p=£1.467
£1.467 x 100m shares = £146.7m

40
Q

ROA

A

Operating profit/ Total net assets * 100

41
Q

Asset turnover

A

Revenues/ Total net assets

CISI Securities (15 decks)

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