Chapter 14 - Sources of information - uses and limitations Flashcards
1
Q
profit from operations (operating profit)
A
gross profit = revenue - cost of sales
operating profit = gross profit - distribution costs and admin expenses
2
Q
price-earnings ratio
A
- how highly investors value a company in it’s ability to grow its income stream
- share price / EPS
3
Q
earnings per share (EPS)
=
types of EPS
A
- measure of profitability expressed as an amount per share
- earnings - available to ordinary shareholders
- basic EPS = net income / number of shares in issue
- EBIT - earnings before interest and tax = before impact of interest payments and tax. EBIT is, therefore, operating income or operating profit
- EBITDA = as above, but also leaves out any financial and acounatcing charges. provdies a way for earnings to be compared internationally, picture is not clouded by diferences in acoutning standards
4
Q
staement of financial position
A
- shows the assets and liabilities of a company
- can be seen as the list of resources a company has and how they’re financed
- used to known as the balance sheet
5
Q
the effect of gearing on profits
A
- exaggerates changes to ROE - incraeses rise faster and decreases fall quicker. this is becasue the proportion of equity is inherently low
- if revenue decreases, a highly geared company is less likely to raise new loans to fund corrective actions needed to mainatin profits
- interest charges also increases costs more for highly geared companies - competitve fixed rates may help in the short term
6
Q
return on equity (ROE)
rerurn on capital employed (ROCE)
sources and calculations
A
- ROE - return on shareholders funds
- two sources: share capital and share premim (funds for new shares) and retained earnings (not paid as dividends)
- (net profit after tax / total equity) x 100
- ROCE - return on the capital used in the business
- sources: equity, long term or short term borrowing
- (profit before interest and tax / capital employed) x 100
7
Q
working capital (current) ratio
calculation
what the ratio means
A
- investors prefer to see enough cash will be generated form current assets to pay off all creditors - protection against a downturn in sales
- current assets / current liabilties
- ratio should be between 1.2 and 2. depends on the type of business and economic conditions
what it means
- low ratio may indicate future insolvency
- high ratio may indicate assets are not being used as profitably as they might be
8
Q
liquidity ratio
=
A
- current assets include stock, whihc does not always sell easily. a more cautios raitio is the liquidity ratio (quick or acid test). it only measures assets that can be quickly turned into cash
- (current assets - stock) / current liabilities
9
Q
price to book ratio
=
what it means
A
- divides the share price by the NAV per shar. is expressed as a multiple to indiacte how much shareholders are paying for the net assets of a company
- share price / NAV per share
- lower thank book value - undervalued or perceived to be stagnat investment
- higher thank book value - perceived to have above average growth potential
10
Q
EU transparency directive
A
- shareholder must notify issuer when holdings exceed 3%. known as notifiable interest in a public company
- rules also include the shares held by parties connected to the investor, such as a spouse
11
Q
depreciation charge methods
=
intangible non current assets
A
- the straight line method - most common in the UK
- (original cost - expected residual value) / expected useful life
- the reducing balance method - more complex formula that calculates a depreciation percentage rate, which is applied to the book value of the asset.
- higher charge than straight line method in early years, but a lower charge in the later years. same ending result
- known as amortisation. they are acounted for in the same way as tangible assets
12
Q
income statement
A
- used to be known as the profit and loss statement. it summarises the company’s revenue transactions over the accounting period to produce a profit or loss
