Chapter 8 - Investment Analysis Flashcards
A company that is unable to generate a positive cash flow will typically…
Be reliant on selling fixed assets and borrowing to meet its day to day needs
Within an auditors report, what is a Qualification?
Where the auditor has material disagreement with the treatment adopted by the directors or there is a material uncertainty
Within an auditors report, what is an adverse opinion?
Where the auditor disagrees with an accounting treatment or a view made in the statements, which the directors refuse to amend
Within an auditors report, what is a disclaimer of opinion?
Where the auditor is unable to form an opinion owing to a considerable amount of uncertainty surrounding the outcome of a particular event, such as a court action against the company.
When looking at consolidated accounts, what is the difference between subsidiaries, associates and investments?
Subsidiaries – where the company owns more than 50% of the shares and, therefore, can control the other company.
Associates – where the company owns between 20% and 50% of the shares and, therefore, can exercise significant control.
Investments – where the company owns less than 20% of the shares.
What is the formula for operating margin?
Operating profit/total sales x100
What is “financial leverage”?
The ratio of debt to equity, also known as gearing. Measures sensitivity to a company’s profits to changes in interest rates.
What is “operating leverage”?
Is the ratio between fixed costs to variable costs, also known as break even analysis. Measures the sensitivity in operating profit to changes in sales.
What indicator is an investor most likely to use to assess the ability of management to maximise their return from the least resources?
Asset turnover
What is the difference between technical and fundamental analysis?
Technical focuses on price data, Fundamental analysis looks at various elements to figure out the intrinsic value of a company
Name 3 current assets and 3 non current assets
Current assets: cash, receivables and inventories
Non current assets: tangible, intangible and long term investments
What is Gordon’s growth model?
Assumes future dividends will grow at a constant rate
