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Actuarial F105 > Chapter 10 - Fundamental analysis > Flashcards

Chapter 10 - Fundamental analysis Flashcards

1
Q

Interest cover

A

(Profit before interest and tax)/(Annual interest on debt)

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2
Q

Capital cover

A

(Total assets - current liabilities - intangibles)/(Balance sheet value of debt)

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3
Q

Net asset value per share

A

(Ordinary shareholders’ funds - intangibles)/(# issued ordinary shares)

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4
Q

Dividend yield

A

(Earnings per share)/(Dividends per share)

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5
Q

Return on capital employed

A

(Profit before interest and tax)/(Share capital & reserves + long-term debt)

or

(Profit before tax)/(Share capital)

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6
Q

Current ratio

A

(Current assets)/(Current liabilities)

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7
Q

Quick ratio

A

(Current assets - inventories)/(Current liabilities)

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8
Q

Price-to-earnings ratio

A

PER= (Share price)/(Earnings per share)

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9
Q

Dividend discount model

A

P = ∑(D_t v(t))

D_t: Dividend payable at time t
v(t): Discount factor for time t

or
If we assume a constant discount rate (i) and dividend growth rate (d) then:

P = D/(i - g)

where D is the dividend payable in one year’s time

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10
Q

Insider trading

A

Trading on the basis of privileged information

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11
Q

Key considerations during credit analysis for bond investment (4)

A
  • Purpose
  • Payback
  • Risks
  • Structure
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12
Q

Key considerations during credit analysis for bond investment: Purpose

A

What the company does and why it needs to borrow

Reasons include:

  • Organic growth
  • Acquisition
  • Investment in an associated company
  • Capital expenditure
  • Dividend / share buy-back
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13
Q

Key considerations during credit analysis for bond investment: Payback

A

Relates to the ability to repay the loan

What is expected source of repayment? Is there a secondary source?
Issues to consider include:
- Cashflow / profit profile
- Possible sale of assets and /or businesses
- Refinancing

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14
Q

Key considerations during credit analysis for bond investment: Risks

A

What risks could jeopardize debt servicing?

Macro factors:

  • Industry analysis and competitive trends
  • regulatory environment
  • sovereign macroeconomic analysis

Company specific factors:

  • Qualitative analysis
  • Financial performance
  • Market position
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15
Q

Key considerations during credit analysis for bond investment: Structure

A

Does the bond structure reflect the risks and protect investors’ interests?

Factors include:

  • Term
  • Level and frequency of coupons
  • Ranking relative to other bonds issued
  • Limits on income and asset cover
  • Quality and value of assets on which it is secured
  • Ability to vary assets on which it is secured
  • Price and yield (particularly in relation to risk-free government bonds)
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16
Q

Operating leverage

A

(Sales - variable costs)/(Profit before interest and tax)

Gives an indication of a company’s level of fixed operating costs
High value => small increase in sales would lead to big change in profits

17
Q

Financial leverage

A

Often used to refer to income gearing which is:

(Interest payments)/(Profit before interest and tax)

Gives an indication of fixed financing costs

18
Q

Asset or capital leverage

A

Debt/(debt + equity)

or

Debt/equity

19
Q

Capital structure

A

Refers to the financial structure of the company i.e. balance between debt and equity

20
Q

Cyclical companies

A

Companies whose fortunes are closely linked to the state of the economy e.g. :

  • Property development companies
  • Luxury goods retailers
21
Q

Defensive companies

A

Companies that are relatively immune to the state of the economy e.g.:

  • food retailers
  • Insurance companies
  • Telecommunication companies
22
Q

Impact of trade cycle on PER: Economy moderately buoyant

A

Defensive + cyclical companies might be similarly rated (have similar PERs)

23
Q

Impact of trade cycle on PER: Economy starts moving into recession

A

Defensive: Remain stable or rise slightly

Cyclical: Likely to fall as market anticipates a drop in profits

24
Q

Impact of trade cycle on PER: Economic recession “Bumping along at the bottom”

A

Cyclical: Will probably have risen from low point as earnings decreased

Defensive: Still higher than cyclical

25
Q

Impact of trade cycle on PER: Green shoots of recovery

A

Cyclical: PER will rise in anticipation of future earnings growth. Increase in earnings will likely lag behind price increase leading to very high PERs

Defensive: PER might be below that of cyclical companies

26
Q

Fundamental share analysis

A

Aims to assess the “true” value of a share by analysing all of the factors that influence the future returns yielded by investment in that share, and hence aims to determine whether or not it is under- or over-priced

Actuarial F105 (8 decks)

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