Accounting for finance exam Flashcards
Ratios
! Price/Earnings
e.p.s = Profit after tax and interest for ordinary shareholders/ number of ordinary shares
(Reflects market’s confidence in future prospects of the company.)
answer = Share price/earnings per share
Comm - Low p/e ratio indicates lower market confidence, dividend yield below average might contribute to this.
- Compares the amount invested by the shareholder in the company with the earnings per share. Number of years current profit represented by share price.
- Reflects market’s confidence in future prospects of the company.
- Compare with average P/E for the industry, given daily in the
Financial Times. - Commonly used as a basis for investment decisions.
! Dividend yield
d.p.s. = dividends/n_shares
(* Of immediate interest to many investors. Dividend is the most immediate reward for share ownership.
* Most companies attempt to maintain a consistently increasing trend.)
Div. yield = d.p.s/share_price * 100%
comm - Low p/e ratio indicates lower market confidence, dividend yield below average might contribute to this.
- Compares dividend per share with the amount invested by the shareholder.
- Might seem low yield compared to other types of investment.
- Dividends are not the only benefit from share ownership. There is an expectation of an increase in share price. Retained profits generate growth in future profits.
! Return on shareholders’ equity
(Profit after tax and interest/Share capital and reserves) * 100%
Share capital and reserves == Total Assets−Total Liabilities
comm - Return on shareholders’ equity is high so there must be some other cause for lack of confidence shown in market price.
- Performance of company from the shareholders’ perspective: success of the company in using the funds provided by shareholders to generate profit.
- This profit will provide new wealth to cover their dividend and to finance future expansion of the business.
- Essential to use profit after tax and after interest charges.
! Net profit on sales
(Net profit before interest and tax / Sales) * 100%
in the net profit on sale, we just need to focus on things related to our sales in the given period.
comm - Net profit on sales is low but usage of fixed assets is high, which explains high returns on equity
- degree of competitiveness in the market economic situation,
- ability to distinguish products,
- ability to control expenses.
! Gross profit percentage
Gross profit * 100/Sales
- Concentrates on costs of making goods and services ready for sale.
- Small changes in this ratio can be highly significant.
- There tends to be a ‘normal’ value for each industry.
- More details are provided by Management Accounting (per
product, …).
! Fixed assets usage
Turnover(Sales)/Fixed assets
! Stockholding period
(Avg stock held/Cost of sales(COGS)) x 365 days
- How quickly goods move through the business:
Generally, the shorter the better, but too short may risk
being ‘out of stock’.
– Assumption that year end figures represent normal level for
year.
! Rate of movement of stock
COGS/Average inventory
! Debtor collection period
Total debtors/Credit sales x 365 days
- Speed of collecting from credit customers.
- Compare with the credit period given, or the normal credit
period for the industry.
! Creditors payment period
Trade creditors/Cost of sales x 365 days
! Current ratio
Current assets/Current liabilities
Are short-term assets adequate to settle short-term liabilities?
* If less than 1/1, look closely at cash flow.
* Ability to generate daily cash might make this ratio
adequate, e.g. a retailer selling to the public.
* Must look at norm for the industry: usually between
1.5/1 and 2/1 for manufacturing industry.
! Debt/equity ratio
Prof used only long-term goals everywhere!
Long-term loans * 100 % /(Ordinary share capital and reserves)
Ordinary share capital and reserves == Total assets - Total liabilities
comm - Gearing is quite high, which contributes to higher return on equity but also shows higher risk in interest cover
- Most often quoted in the financial press. A high figure indicates reliance on sources of long-term loan finance.
- A low gearing percentage indicates a low exposure to financial risk.
- ‘Long-term loan’ includes short-term portion of loans, in current
liabilities in balance sheet. - Also bank overdraft, if a permanent feature.
! Interest cover
Profit before interest and tax/Interest
! return on capital employed
operating profit(before interest and tax)/(total assets - current liabilities) * 100%
(тут в оперативно профит учитывается позитивный процент, если он есть)
ROCE is related to all operating profit we earned form our core business and wanted to know how our long-term finance is well managed to create all profits, so we need to consider interest recieveable .
- Performance of company as a whole. * Measure of management efficiency.
Total assets-current liabilities=Ordinary share capital+reserves+LT loans - Measure of how well the long-term finance is being used to generate operating profits
Dividend Cover (Payout Ratio)
Earnings per share/Dividend per share
The higher the dividend cover, the ‘safer’ the dividend.
