8.2 Financial Statement analysis Flashcards
EPS
Profit available to ordinary shareholders/number of ordinary shares
What is diluted EPS
EPS that considers all potentially dilutive instruments in the number of ordinary shares
eg
- Convertible preference shares
- Convertible bonds
- Warrants
Historic P/E ratio
Market price per shares/ EPS
What is trailing P/E ratio
Ignore one-off events such as windfalls or exceptional items
What is prospective P/E ratio
Uses current financial year forecast
EV/EBITDA
EV/EBITDA
EV
market value of debt+ market value of equity
enterprise value is cost of buying whole company
EBITDA
EBIT (operating profit) + depreciation+ amortization
What is capital structure
Proportion of debt and equity
Gross dividend yield
Dividend per share/ market price per share *100
Gross dividend cover
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
debt/equity ratio
Interest bearing debt (inc pref shares and overdraft) / equity shareholder funds *100
Higher % means more highly geared
What is net debt to equity
Removes cash and short term investments which could be used to repay debt
What does high gearing mean
- More highly geared means less likely to borrow more
- More volatile profits
- exposes shareholder to reduced income as debt payments obligatory by dividends discretionary
What are the financial gearing ratios
Debt/equity ratio and interest cover
Interest cover ratio
Tells how easily company can pay interest expenses on outstanding debt
Profit before interest and tax (operating profit)/ interest expense
What are the liquidity ratios
Current and quick ratio. Tells how able is company to meet liabilities in next 12 months
Current ratio
Current assets (Inventory,receivables,cash)
/
Current liabilities
Quick ratio
(Current assets- inventory)/ current liabilities
or
(receivables+ cash)/ current liabilities
What are operating/profitability ratios
Return On Capital Employed (ROCE)
Return On Equity (ROE)
Profit Margin
What is return on assets
same as ROCE
List all equations for assets and liabilities (4)
Total assets= Equity+ Liability
Non current assets+ current assets= Capital + Reserves + Liabilities
Equity = Captial + Reserves
Capital Employed= Total assets - Current liabilities
Return on capital employed
operating profit/ capital employed *100
Return on equity
Net Income (PAT)/ Shareholders equity *100
Profit margin formula and what it tells you
What % of revenue becomes profit
= Profit/Revenue as %
Higher % means more efficient at turning revenue into profit
Gross profit margin
% of revenue company converts to profit after considering COST OF SALES
Operating profit margin
% of revenue company converts to profit after considering COST OF SALES AND OTHER OPERATING COSTS
Capital employed
Total assets - current liabilities
If a company undergoes a stock split, which of the following will have to be restated?
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.
Which of the following would explain why an investor wishes to use a net total return index rather than a price return index?
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.
If a company has high interest cover on unsecured loan stock which it has recently issued, what is the consequence of this?
Improved market rating
The best definition of earnings per share is:
Profit after tax minus preference dividend divided by shares outstanding
If an investor holds one share in a company that subsequently undertakes a 4:1 bonus issue, they would have to multiply EPS by:
0.20
An uncovered dividend is one paid out of:
Retained earnings
Four shares have the following share prices and EPS. Which is the most highly-rated in relation to growth?
Highest rated is one with highest P/E ratio
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)?
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%.
Which of the following is most likely to cause an increase in interest coverage?
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
A company undertakes a 2:3 scrip issue. To correctly restate the previously reported EPS figure, multiply it by:
3/5
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?
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
ROA
Operating profit/ Total net assets * 100
Asset turnover
Revenues/ Total net assets
