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Investment Management > Chapter 2 - Fundamental analysis > Flashcards

Chapter 2 - Fundamental analysis Flashcards

1
Q

what is fundamental analysis

A
  • determining the intrinsic value of shares by considering the current and expected value of financial performance
  • current market value > over valued
  • current market value < under valued
  • determines which shares to buy
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2
Q

Intrinsic value

A

discounting future income and dividends

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3
Q

Stakeholders in financial analysis

A

shareholders
debt
management
diverse groups

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4
Q

current and potential shareholders

A

potential earnings and dividends per share
interested in ability to generate income
risk associated with income generated

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5
Q

current and potential providers of debt capital

A

current amount of debt in the capital structure and if the business can settle capital and interest payments

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6
Q

management and employees

A

to ensure efficient internal decision making - continuously informed about financial position
ability to survive long term

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7
Q

Diverse groups

A

not directly involved in activities

customers, providers, competition, stockbrokers

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8
Q

Financial statements

A

statement of financial position

statement of profit and loss

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9
Q

Statement of profit or loss

A

summary of enterprise performance for a specific period of time
does not necessarily represent cash flow as non cash flow items are also represented

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10
Q

Revenue

A

represents all compensation received for products pr services provided
- Sales

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11
Q

Cost of Sales

A

costs directly incurred in order to generate revenue

- opening inventory + purchases - closing inventory

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12
Q

Gross Profit

A

calculated by subtracting COS from the revenue

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13
Q

Operating Profit

A

GP - Operating expenses

indication of the profit generated by primary activities

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14
Q

Profit before tax

A

investment income (interest and dividends received) + operating profit + non-recurring profits (gain) - Non recurring profits (loss) - finance costs

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15
Q

Profit after tax

A

profit before tax - tax

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16
Q

attributable earnings

A

portion of profit that remains after tax and preference dividends have been subtracted
available for ordinary shareholders and paid out as ordinary dividends

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17
Q

Retained earnings

A

portion of earnings not paid out as dividends and reinvested in the enterprise
- part of enterprise reserves and utilised to finance activities

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18
Q

Statement of financial position

A

summary of enterprises financial position on a specific date
- 2 sections assets ( indication of how much capital is invested in assets), equity and liability ( different sources of capital).

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19
Q

Assets

A

represent a capital investment in items
utilise items to generate income
non current and current

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20
Q

Non- current assets

A

used for a relatively long period of time (more than 1 year)
fixed property of enterprise

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21
Q

what is Property plant and equipment at cost price and why is it a problem ?

A

non-current asset
all physical non current assets such as vehicles, equipment, property, buildings , production facilities
usually shown at cost price - weakness of FP as it is not an accurate indication due to depreciation
Solve problem: include replacement values
- reevaluation reserve

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22
Q

Accumulated depreciation

A

the total amount of depreciation they had born provided for PPE

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23
Q

PPE at carrying value

A

PPE at cost price - depreciation

proceeds compared to carrying value to determine gain/loss when PPE is sold

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24
Q

Intangible assets

A

goodwill and patents
property of enterprise and can be used to generate income
difficult to allocate monetary value

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25
financial assets
indicated at their original price while current market price can also be included investments loans to other parties
26
Current assets
used for a relative short period of time (less than 1 year) | included in physical production process of an enterprise
27
Non current vs Current assets
Turnover period (<1
28
Inventories
stock necessary for continuous operation | production vs. retail
29
trade receivables
outstanding portion of credit sales
30
Cash
all cash held by enterprise petty cash and cash in bank accounts cash equivalents
31
Prepayments
paid an expense before payment was required Payments made for transactions that will only occur in the following accounting period decrease future liabilities
32
shareholders Equity
all capital provided by shareholders
33
ordinary share capital
proceeds from sale of ordinary shares represent shareholders stake in management issued no. ordinary shares x average issue price of shares
34
non-distriubutable Reserves
reserves that cannot be paid out to the ordinary shareholders reevaluation reserves and capital redemption reserves
35
distributable reserves
reserves distributable to ordinary shareholders | retained earnings
36
ordinary shareholders equity
total shareholding ordinary share capital no distributable distributable reserves
37
preference share capital
capital obtained by selling preferences shares to investors Preference right above ordinary shareholders to receive dividends Fixed dividend proceed, guarantee of dividend payout
38
non-current liabilities
long term debt capital interest bearing borrowings: long term debt capital long terms loans, mortgage loans, debentures
39
current liabilities
short term debt capital | trade payables, bank overdraft , short term loans, dividends payable, current tax liabilities
40
return on total assets
how effectively total assets are used to generate income operating profit + investment income / average total assets x 100
41
return on equity
indication of return generated on equity invested in the company operating profit + investment income - finance costs / average equity x 100
42
cost of debt (return on debt capital)
average cost associated with debt capital used by the company. Debt capital = current liabilities and non current liabilities finance costs/aver debt capital x 100
43
return on financial assets
indication of average return earned on company's external investments investment income/ average financial assets x 100
44
gross profit margin
indication of the portion of the enterprises revenue that realise as GP GP/revenue x 100
45
operating profit margin
percentage of revenue realised as profit after provision has even made for all normal expenses operating profit/revenue x 100
46
EBIT margin
indication of the profit realised before taking any finance costs and tax into consideration profit before tax +finance costs/ revenue x 100
47
Net profit margin
which part of the revenue is available to the SH Profit after tax/ revenue x 100
48
current ratio
current assets compared to current liabilities to maintain adequate levels of liquidity should be at least 2 current assets / current liabilities
49
acid test ratio
current assets - inventory - prepayments /current liabilities
50
Turnover ratio and time of current assets
number of times per year current asset is converted to revenue and how long it takes to compete a conversion cycle Turnover ratio: net revenue / average current assets Turnover time : average current assets/ net revenue x 360
51
turnover ratio and time of PPE
higher the ratio the more times converted into revenue ratio: net revenue/ average PPE @ carrying value time: Average PPE @ carrying value / net revenue x 360
52
turnover time of trade receivables
ratio: credit revenue/ average trade receivables time: average trade receivables/ credit revenue x 360
53
Turnover ratio and time of inventory
ratio: COS/average inventory time: Average inventory/ COS x 360
54
Debt-to-assets ratio (debt ratio)
debt capital/total assets x 100 or debt capital/ total capital x 100
55
Finance cost coverage
profit before finance cost and tax/ finance costs
56
ordinary dividend coverage
``` earnings per share/ dividend per share or profit after tax- preference share dividends/ ordinary share dividends or earnings yield/ dividends yield ```
57
earnings per share
attributable earnings/ average number of ordinary shares issues
58
earnings yield
earnings per share/ market price per share x 100
59
dividend per share
ordinary dividends declared/ average number of ordinary shares issued
60
dividend yield
dividend per share/market price per share x 100
61
price earnings ratio
market price per share/ earnings per share
62
book value per share
SH equity - PS - intangible assets/ no. OS issued

Investment Management (6 decks)

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