Company Analysis

Question 1

Why is revenue per employee important? (3)

Answer 1

• particularly important in service industry
• if staff costs are main expense
• measures efficiency / productivity
• shows quality of management

Question 2

What is quality of earnings? (4)

Answer 2

• accurately represents the trading performance of the business
• not manipulated by accounting policies or one off items

Question 3

Ways for a company to return money to investors rather than annual dividend (3)

Answer 3

• special dividends
• share buy backs via the market
• tender issue to repurchase shares (company buys back own shares)
• sell the company

Question 4

Why might a company not pay all EPS out as a dividend? (3)

Answer 4

• ## strengthen balance sheetReinvest earnings in business
• set at a sustainable level for future

Question 5

What is a cyclical share? How would it affect a company’s profits and share price (7)

Answer 5

• shares that are positively correlated with the economic cycle
• people can do without non essential goods
• in a recession
• unemployment rises
• demand for goods decreases
• profits falls
• share price falls

Question 6

Main drawbacks of using price to book for valuing a company for investment (6)

Answer 6

• book value of assets may differ from market value
• it does not factor in future cash flow
• only measures tangible assets/doesn’t measure intangible assets
• can be distorted by price movements
• no suitable to compare companies in different sectors
• low price to book does not automatically mean the company is undervalued
• low P/B may be a function of a terminally falling share price