Ch. 21 Financial Analysis Flashcards
What is gearing ratio’s formula?
- (NCL+ Preference share capital)/ (NCL + Shareholders’ fund) x 100%
- (NCL)/ (NCL + Closing Capital) x 100%
What does higher ratio of gearing ratio mean?
Higher the ratio, risker the business (unable to meet long term obligations).
What is earning per share’s formula ?
(NPAT - Preference Dividend) / (Number of ordinary shares issued)
What does higher earning per share ratio mean?
Higher the ratio, higher potential return. ($/ share)
What is dividend cover ratio’s formula?
(NPAT - preference dividend)/ (Ordinary Dividend)
What does higher ratio of dividend cover mean?
Higher the ratio, less profit portion are distributed.
Thus, more profits are retained to finance its future development.
Greater ability to maintain dividend at the same level in bad year.
What is price earning ratio’s formula?
(Current market price per ordinary share)/ (EPS)
What does high EPS mean in a poor prospect?
May trick citizens into investing with high dividend to raise fund.
What does high price earning ratio mean ?
High degree of confidence from investors-> sign to buy more share.
What does low price earning ratio mean?
Opportunity to buy share at a lower price.
What are the limitations of ratio analysis?
- Misleading results if the underpinning financial information is poor. E.g. poor estimation on depreciation.
- Ratios can only identify the symptoms but not the causes. Different interpretations can be drawn by different people.
What does high trade payables turnover/ low trade payables repayment period mean?
May able to enjoy discount received
What does low trade payables turnover/ high trade payables repayment period mean?
Keep cash for operation and interest free credit period.
What does low inventory turnover/ high inventory holding period mean?
Higher chance for abnormal inventory loss -> decrease net profit.
What does higher profit ratio mean?
It means that it has better ability to generate profit.
What does higher liquidity/ current ratio mean?
It means it has a better ability to meet short term obligations when due.
