Chapter 14: Company Analysis

Question 1

Statement that helps in understanding financial health and potential profitability.

Answer 1

Statement of Comprehensive Income

Question 2

Growth is desirable, flat or declining trends are less favourable. High growth is preferable to a low or moderate rate.

Answer 2

Revenue

Question 3

A rising trend over time may indicate that a company is having difficulty keeping costs under control. A falling trend may indicate the company is operating cost effectively and is likely to be profitable.

Answer 3

Operating Costs

Question 4

Shows how much it generally pays out in the form of dividends to shareholders.

Answer 4

Dividend Payout Rate

Question 5

Helps to understand a company’s overall financial situation.

Answer 5

Statement of Financial Position

Question 6

Refers to the distribution of debt and equity that comprise the company’s finances.

Answer 6

Capital Structure

Question 7

The earnings of a company are considered to be leveraged if the capital structure contains debt or preferred shares. Leveraged companies increase earnings faster during an upswing in the business cycle and collapse more quickly as economic conditions deteriorate.

Answer 7

The effect of leverage

Question 8

Used to assess management effectiveness and other intangibles that cannot be measured with concrete data.

Answer 8

Qualitative Analysis

Question 9

A measure of how easy it is to buy or sell a security on a stock exchange without causing a significant movement in its price.

Answer 9

Liquidity of common shares

Question 10

Company analysis involves monitoring the operations of the company for changes that might affect the price of the shares and the dividend it pays.

Answer 10

Continuous monitoring

Question 11

Analysts identify trends by collecting a base period, treating the figure or ratio for that period as 100, and then dividing it into the comparable ratios for subsequent periods.

Answer 11

Trend Analysis

Question 12

Used to judge a company’s ability to meet its short-term commitments

Answer 12

Liquidity Ratios

Question 13

Calculate working capital.

Answer 13

Subtract total current liabilities from total current assets

Question 14

Working Capital Ratio

Answer 14

Current Assets / Current Liabilities

Question 15

Quick Ratio (the acid test)

Answer 15

Current Assets - Inventories / Current Liabilities

Question 16

Show how well the company can deal with its debt obligations

Answer 16

Risk analysis ratios

Question 17

Asset coverage ratio

Answer 17

Tangible Assets - (Current Liabilities - Short Term Debt) / Total Debt Outstanding

Question 18

Debt to equity ratio

Answer 18

Total Debt Outstanding / Equity

Question 19

Cash flow-to-total debt outstanding ratio

Answer 19

Cash flow from operating activities / total debt outstanding. High ratio is positive, low ratio is considered negative

Question 20

Interest Coverage

Answer 20

Profit before interest charges and taxes / interest charges

Question 21

Illustrate how well management is making use of the company’s resources

Answer 21

Operating performance ratios

Question 22

Gross profit margin ratio

Answer 22

Revenue - COS / revenue

Question 23

Net Profit Margin

Answer 23

Profit - share of profit of associates / revenue

Question 24

Return on common equity

Answer 24

Shows the dollar amount of earnings that were products for each dollar invested by the company’s common shareholders.
Profit / total equity

Question 25

Inventory turnover ratio

Answer 25

Cost of sales / inventory. Divide 365 by this number to get the figure in days

Question 26

Show the investor what the company’s shares are worth, or the return on owning them

Answer 26

Value Ratios

Question 27

Dividend Payout Ratio

Answer 27

Common share dividends / Profit * 100

Question 28

Earnings per common share

Answer 28

Profit / weighted average number of common shares outstanding. If dilution occurs, the number of outstanding shares increases, which results in each shareholder holding a smaller part of the company

Question 29

Diluted EPS

Answer 29

Adjusted profit / adjusted weighted average number of common shares outstanding

Question 30

Dividend Yield

Answer 30

Indicated annual dividend per share / current market price * 100

Question 31

Equity value per common share

Answer 31

Equity / number of common shares outstanding

Question 32

Price to earnings ratio

Answer 32

Current market price of common shares / earnings per share

Question 33

Dividend Discount Model

Answer 33

Relates a current stock price to the present value of all expected future dividends in the future.
Div1 / r - g

Question 34

Indicates the margin of safety for preferred dividends. Measures the amount of money a firm has to pay dividends to preferred shareholders.

Answer 34

Preferred Dividend Coverage Ratio

Question 35

Analysts like to see that the minimum equity value per preferred share in the last five fiscal years is at least two times the dollar value of assets that each preferred share would be entitled to receive in the event of liquidation.

Answer 35

Equity (or book value) per preferred share

Question 36

Make sure a company has an established record of dividend payments to its preferred shareholders

Answer 36

Dividend Payments

Question 37

A company’s preferred shares may be rated by one of the recognized securities rating services, so we should ask what the rating is and if it’s high enough to merit investment

Answer 37

Credit assessment