Chapter 14: Company Analysis Flashcards
Statement that helps in understanding financial health and potential profitability.
Statement of Comprehensive Income
Growth is desirable, flat or declining trends are less favourable. High growth is preferable to a low or moderate rate.
Revenue
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.
Operating Costs
Shows how much it generally pays out in the form of dividends to shareholders.
Dividend Payout Rate
Helps to understand a company’s overall financial situation.
Statement of Financial Position
Refers to the distribution of debt and equity that comprise the company’s finances.
Capital Structure
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.
The effect of leverage
Used to assess management effectiveness and other intangibles that cannot be measured with concrete data.
Qualitative Analysis
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.
Liquidity of common shares
Company analysis involves monitoring the operations of the company for changes that might affect the price of the shares and the dividend it pays.
Continuous monitoring
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.
Trend Analysis
Used to judge a company’s ability to meet its short-term commitments
Liquidity Ratios
Calculate working capital.
Subtract total current liabilities from total current assets
Working Capital Ratio
Current Assets / Current Liabilities
Quick Ratio (the acid test)
Current Assets - Inventories / Current Liabilities
Show how well the company can deal with its debt obligations
Risk analysis ratios
Asset coverage ratio
Tangible Assets - (Current Liabilities - Short Term Debt) / Total Debt Outstanding
Debt to equity ratio
Total Debt Outstanding / Equity
Cash flow-to-total debt outstanding ratio
Cash flow from operating activities / total debt outstanding. High ratio is positive, low ratio is considered negative
Interest Coverage
Profit before interest charges and taxes / interest charges
Illustrate how well management is making use of the company’s resources
Operating performance ratios
Gross profit margin ratio
Revenue - COS / revenue
Net Profit Margin
Profit - share of profit of associates / revenue
Return on common equity
Shows the dollar amount of earnings that were products for each dollar invested by the company’s common shareholders.
Profit / total equity
Inventory turnover ratio
Cost of sales / inventory. Divide 365 by this number to get the figure in days
Show the investor what the company’s shares are worth, or the return on owning them
Value Ratios
Dividend Payout Ratio
Common share dividends / Profit * 100
Earnings per common share
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
Diluted EPS
Adjusted profit / adjusted weighted average number of common shares outstanding
Dividend Yield
Indicated annual dividend per share / current market price * 100
Equity value per common share
Equity / number of common shares outstanding
Price to earnings ratio
Current market price of common shares / earnings per share
Dividend Discount Model
Relates a current stock price to the present value of all expected future dividends in the future.
Div1 / r - g
Indicates the margin of safety for preferred dividends. Measures the amount of money a firm has to pay dividends to preferred shareholders.
Preferred Dividend Coverage Ratio
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.
Equity (or book value) per preferred share
Make sure a company has an established record of dividend payments to its preferred shareholders
Dividend Payments
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
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