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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
Q

financial assets

A

indicated at their original price while current market price can also be included
investments
loans to other parties

26
Q

Current assets

A

used for a relative short period of time (less than 1 year)

included in physical production process of an enterprise

27
Q

Non current vs Current assets

A

Turnover period (<1

28
Q

Inventories

A

stock necessary for continuous operation

production vs. retail

29
Q

trade receivables

A

outstanding portion of credit sales

30
Q

Cash

A

all cash held by enterprise
petty cash and cash in bank accounts
cash equivalents

31
Q

Prepayments

A

paid an expense before payment was required
Payments made for transactions that will only occur in the following accounting period
decrease future liabilities

32
Q

shareholders Equity

A

all capital provided by shareholders

33
Q

ordinary share capital

A

proceeds from sale of ordinary shares
represent shareholders stake in management
issued no. ordinary shares x average issue price of shares

34
Q

non-distriubutable Reserves

A

reserves that cannot be paid out to the ordinary shareholders
reevaluation reserves and capital redemption reserves

35
Q

distributable reserves

A

reserves distributable to ordinary shareholders

retained earnings

36
Q

ordinary shareholders equity

A

total shareholding
ordinary share capital
no distributable
distributable reserves

37
Q

preference share capital

A

capital obtained by selling preferences shares to investors
Preference right above ordinary shareholders to receive dividends
Fixed dividend proceed, guarantee of dividend payout

38
Q

non-current liabilities

A

long term debt capital
interest bearing borrowings: long term debt capital
long terms loans, mortgage loans, debentures

39
Q

current liabilities

A

short term debt capital

trade payables, bank overdraft , short term loans, dividends payable, current tax liabilities

40
Q

return on total assets

A

how effectively total assets are used to generate income

operating profit + investment income / average total assets x 100

41
Q

return on equity

A

indication of return generated on equity invested in the company

operating profit + investment income - finance costs / average equity x 100

42
Q

cost of debt (return on debt capital)

A

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
Q

return on financial assets

A

indication of average return earned on company’s external investments

investment income/ average financial assets x 100

44
Q

gross profit margin

A

indication of the portion of the enterprises revenue that realise as GP

GP/revenue x 100

45
Q

operating profit margin

A

percentage of revenue realised as profit after provision has even made for all normal expenses

operating profit/revenue x 100

46
Q

EBIT margin

A

indication of the profit realised before taking any finance costs and tax into consideration

profit before tax +finance costs/ revenue x 100

47
Q

Net profit margin

A

which part of the revenue is available to the SH

Profit after tax/ revenue x 100

48
Q

current ratio

A

current assets compared to current liabilities to maintain adequate levels of liquidity should be at least 2

current assets / current liabilities

49
Q

acid test ratio

A

current assets - inventory - prepayments /current liabilities

50
Q

Turnover ratio and time of current assets

A

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
Q

turnover ratio and time of PPE

A

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
Q

turnover time of trade receivables

A

ratio: credit revenue/ average trade receivables
time: average trade receivables/ credit revenue x 360

53
Q

Turnover ratio and time of inventory

A

ratio: COS/average inventory
time: Average inventory/ COS x 360

54
Q

Debt-to-assets ratio (debt ratio)

A

debt capital/total assets x 100
or
debt capital/ total capital x 100

55
Q

Finance cost coverage

A

profit before finance cost and tax/ finance costs

56
Q

ordinary dividend coverage

A 
earnings per share/ dividend per share 
or 
profit after tax- preference share dividends/ ordinary share dividends
or 
earnings yield/ dividends yield
57
Q

earnings per share

A

attributable earnings/ average number of ordinary shares issues

58
Q

earnings yield

A

earnings per share/ market price per share x 100

59
Q

dividend per share

A

ordinary dividends declared/ average number of ordinary shares issued

60
Q

dividend yield

A

dividend per share/market price per share x 100

61
Q

price earnings ratio

A

market price per share/ earnings per share

62
Q

book value per share

A

SH equity - PS - intangible assets/ no. OS issued

Investment Management (6 decks)

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