8.2 Financial Statement analysis

Question 1

EPS

Answer 1

Profit available to ordinary shareholders/number of ordinary shares

Question 2

What is diluted EPS

Answer 2

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

eg
- Convertible preference shares
- Convertible bonds
- Warrants

Question 3

Historic P/E ratio

Answer 3

Market price per shares/ EPS

Question 4

What is trailing P/E ratio

Answer 4

Ignore one-off events such as windfalls or exceptional items

Question 5

What is prospective P/E ratio

Answer 5

Uses current financial year forecast

Question 6

EV/EBITDA

Answer 6

EV/EBITDA

Question 7

EV

Answer 7

market value of debt+ market value of equity

enterprise value is cost of buying whole company

Question 8

EBITDA

Answer 8

EBIT (operating profit) + depreciation+ amortization

Question 9

What is capital structure

Answer 9

Proportion of debt and equity

Question 10

Gross dividend yield

Answer 10

Dividend per share/ market price per share *100

Question 11

Gross dividend cover

Answer 11

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

Question 12

debt/equity ratio

Answer 12

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

Higher % means more highly geared

Question 13

What is net debt to equity

Answer 13

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

Question 14

What does high gearing mean

Answer 14

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

Question 15

What are the financial gearing ratios

Answer 15

Debt/equity ratio and interest cover

Question 16

Interest cover ratio

Answer 16

Tells how easily company can pay interest expenses on outstanding debt

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

Question 17

What are the liquidity ratios

Answer 17

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

Question 18

Current ratio

Answer 18

Current assets (Inventory,receivables,cash)

/

Current liabilities

Question 19

Quick ratio

Answer 19

(Current assets- inventory)/ current liabilities

or

(receivables+ cash)/ current liabilities

Question 20

What are operating/profitability ratios

Answer 20

Return On Capital Employed (ROCE)

Return On Equity (ROE)

Profit Margin

Question 21

What is return on assets

Answer 21

same as ROCE

Question 22

List all equations for assets and liabilities (4)

Answer 22

Total assets= Equity+ Liability

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

Equity = Captial + Reserves

Capital Employed= Total assets - Current liabilities

Question 23

Return on capital employed

Answer 23

operating profit/ capital employed *100

Question 24

Return on equity

Answer 24

Net Income (PAT)/ Shareholders equity *100

Question 25

Profit margin formula and what it tells you

Answer 25

What % of revenue becomes profit = Profit/Revenue as % Higher % means more efficient at turning revenue into profit

Question 26

Gross profit margin

Answer 26

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

Question 27

Operating profit margin

Answer 27

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

Question 28

Capital employed

Answer 28

Total assets - current liabilities

Question 29

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

Answer 29

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.

Question 30

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

Answer 30

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.

Question 31

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

Answer 31

Improved market rating

Question 32

The best definition of earnings per share is:

Answer 32

Profit after tax minus preference dividend divided by shares outstanding

Question 33

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

Answer 33

0.20

Question 34

An uncovered dividend is one paid out of:

Answer 34

Retained earnings

Question 35

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

Answer 35

Highest rated is one with highest P/E ratio

Question 36

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)?

Answer 36

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%.

Question 37

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

Answer 37

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

Question 38

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

Answer 38

3/5

Question 39

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?

Answer 39

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

Question 40

ROA

Answer 40

Operating profit/ Total net assets * 100

Question 41

Asset turnover

Answer 41

Revenues/ Total net assets