Accounting Topic 3 (Financial Statement Analysis) Flashcards
financial analysis tools
- financial ratio analysis
- graphics
financial ratios
- comparable across companies & see trends
- ratios are interrelated
-> inefficient = poor profitability = low value = cant sell equity = low leverage = high costs/risky funding - express 1 number in relation to another
- standardise financial data in terms of mathematical relationships expressed as %, times or days
analysis of past performance
- aspects of performance = success competing in the industry
- How well perform (own history and competitors)
- Causes of performance
- Does the performance reflect the company’s strategy?
ratios are not always relevant:
- irrelevant for certain companies
- redundant
- Industry specific = as important as general financial rations
-Different users = focuses differ (creditors, investors)
-Creditors - focus on solvency ratios (leverage and coverage)
-Investors (market ratios, P/E, P/B) combined with financial
-Sources categorise some ratios differently and include different ratios - Accounting standards = different reported = limit comparability
liquidity
whether company can pay off interest
whether the company has repaid part of the debt/ability to repay
- investors are concerned with if bankruptcy - debt holders are paid first
4 performance ratios of a company
PROFITABILITY
- Asset turnover
- ROE
- profit margin
- ROCe
5 position ratios of a company
LIQUIDITY
1. Quick ratio
- inventory holding
- receivables collection period
- payables payment period
- current ratio
3 Position ratios of company
GEARING
1. Interest cover
- Gearing
- Debt to equity
Debt vs Equity
· Cost of debt < cost of equity
- Most debt is secured against assets
- Creditors are not really going to lose money
- Equity more expensive = if Bankrupt not getting anything till all liabilities are paid
- Higher expected returns effectively from shareholders
- Too much debt is risky for shareholders as
· Shareholders dividends are paid after interest
· Investors take the largest portion of the risk
Repayment of equity capital comes after principal repayments of debt on winding up of the company
Capital employed
debt + equity
(2 main ways of funding a company)
investors and return
- investors concerned with total return on their investment
return is made up of 2 elements
- dividends
- capital growth - change in mkt value
(gains through share price going up)
3 elements of investor ratios
- market value - amount paid for share
- earnings - total available to pay out to SHs
- dividend - what is paid out to SHs
4 investor ratios
RETURN ON INVESTMENT
1. dividend cover
2. dividend payout ratio
3. EPS
4. PE ratio
EPS
○ Earnings/Number of shares
- Share price movements
- Heavily regulated calculation from accounting standards
- Basic EPS
- Diluted EPS
Number of shares are going up