Component 3 (fundamental analysis) Flashcards
corporate actions?
decisions made by management that influence issued securities
mandatory corporate actions?
initiated by the board of directors
participation of shareholders is mandatory (shareholders do nothing -> passive beneficiaries)
voluntary corporate actions?
shareholders elect to participate
a response from the shareholders is required for the corporation to process the action
dividends?
portion of the profit, after the payment of tax, distributed to the shareholders (preference shares get first, then ordinary shares)
remainder of the earnings will be reinvested into the company in the form of retained earnings –> may be utilised in the future, if there are small profits or even losses, to pay dividends
total dividend calc?
interim dividend (after 6 months) + final dividend (end of financial year)
timeline of dividends?
settlement cycle of transactions on JSE
T+3 = transaction day + 3 business days
- announcement/ declaration: at least 13 business days before the record date
following is announced:
- dividend amount
- record date
- and the date on which dividend payments will be made (usually the business day following the record date)
- cum-dividend: buy shares cum-dividend - including right to dividends
last day to trade = 3 business days before record date - ex-dividend: one business day after the end of cum-dividend until payment date
can buy shares but not entitled to dividends
if shares are bought, the transaction only settles after the record date
- record date: share register is closed and reviewed to see who the rightful owners are
whoever is listed, qualifies for dividends
always on a Friday for mandatory corporate actions (public holiday = previous business day)
- payment date: dividends electronically paid into account
capitalisation issue?
shareholders receive additional shares for free (in specific ratio)
takes place at the current market price
company finance issue from distribution reserves
shareholder can keep or sell the shares
purpose of capitalisation issue?
provide shareholders with an opportunity to share in the prosperity of the company, especially if there is insufficient cash to pay dividends
subdivision (stock split)?
existing shares are subdivided into 2 or more shares
shareholders receive more shares, but with lower average issue value (no inflow of capital)
purpose of subdivision?
make shares more affordable (lower market price of shares) to incr4ease tradability and prevent hostile takeovers
opposite of subdivision?
share consolidation
technical analysis?
looks at economy, cycles of upswings and declines in market, correct timing
focus = when to buy
fundamental?
determining value of company/ shares using financial ratios
focus = what to buy
JSE listing requirements?
- limited to max 20% of issued shares at authorisation time
- no buybacks at price exceeding weighted average of market price, 5 business days preceding buyback by more than 10%
- quantity and price must be announced with every 3% bought back
Companies Act no 71 of 2008 on share buyback?
directors don’t require permission from shareholders to do buyback, unless bought from director
company must be liquid and solvent after distribution
purpose of share buyback?
accounting advantage and transaction can lead to increase in EPS of remaining shares (number of issued shares decrease)
share buybacks?
voluntary corporate action
legislation changed in 1999 to allow it
use excess cash
underwriting?
large financial institution undertakes to buy all shares not sold during rights issue at issue price (underwriter’s fee and confidence of large financial institution)
timeline of rights issue?
- announcement: announce planned issue
- cum-rights trading: buy shares cum-rights, including right to the new shares
- ex-rights trading: from day after end of cum-rights until closing date, excluding right to new shares
- record date: company closes share r3egister, sends Nil Paid letters of allocation (NPL) to existing shareholders
-closing date/ election deadline: shares allocated to applicants that gave instruction to exercise right
purpose of rights issue?
acquire additional capital
rights issue three options?
- exercise the rights: pay for new shares at discounted price
- sell the rights: receive the price the rights are trading for at that time; can no longer buy more shares at the discounted price
- do nothing: rights will lapse after closing date
rights issue?
voluntary corporate action
existing shareholders receive the right to purchase additional shares in the company
issue at price lower than market price - issue price
share consolidation?
market price is very low –> consolidate several shares into one new share
too many small shareholders = high administrative costs
number of issued shares will decrease while the average issue price (along with it the market price) per share increases
What is the objective of financial analysis?
The objective of financial analysis is to obtain information about the financial position of an enterprise.
Who are the four main groups of stakeholders identified in financial analysis?
- Current and potential shareholders
- Current and potential providers of debt capital
- Management and employees
- Diverse groups (e.g., customers, raw material providers, competitors, government, etc.)
What are the interests of current and potential shareholders in financial analysis?
Shareholders are interested in the enterprise’s ability to generate income, the risk associated with that income, and earnings and dividends per share.
What do current and potential providers of debt capital focus on in financial analysis?
They focus on the amount of debt in the enterprise’s capital structure and its ability to meet capital and interest repayments, with an emphasis on solvency and liquidity.
Why is financial analysis important to management and employees?
Management uses financial analysis for efficient internal decision-making, while employees are interested in the enterprise’s long-term survival.
Who are considered diverse groups of stakeholders in financial analysis?
Diverse stakeholders include customers, providers of raw materials, competitors, government organizations, stockbrokers, etc., who may have an interest in the financial performance of the enterprise.
What financial statements are required by the Companies Act?
The Companies Act requires the publication of several financial statements, including the statement of profit or loss and the statement of financial position.
What does the statement of profit or loss summarize?
The statement of profit or loss provides a summary of a company’s financial performance over a specific period, usually one year, showing how revenue is allocated and what remains as retained earnings.
Does the statement of profit or loss represent cash flow? Why or why not?
No, it does not represent cash flow because it includes non-cash flow items like depreciation, credit sales, and credit purchases.
What is “revenue” in the statement of profit or loss?
Revenue represents all compensation received for products or services provided by the enterprise during the period. For a trading concern, revenue is the company’s sales.
How is the “cost of sales” calculated?
Cost of sales = Opening inventory + Purchases - Closing inventory.
What is “gross profit”?
Gross profit is calculated by subtracting the cost of sales from revenue. It represents the profit from the enterprise’s sales activities.
How is “operating profit” calculated?
Operating profit is calculated by subtracting operating expenses from gross profit. It shows the profit generated by the enterprise’s primary activities.
What is “profit before tax”?
Profit before tax is calculated by adding investment income and non-recurring profits (like gains from PPE sales) to the operating profit and then subtracting finance costs (interest paid).
What is “profit after tax”?
Profit after tax is the amount of profit remaining after income tax has been subtracted from the profit before tax. It’s available for paying preference share dividends.
What are “attributable earnings”?
Attributable earnings are the profit remaining after subtracting preference dividends and tax. This is the amount available for ordinary shareholders and can be paid out as ordinary dividends.
What are “retained earnings”?
Retained earnings are the portion of earnings not paid out as dividends, reinvested in the enterprise, and transferred to the company’s reserves to finance future activities.
What is the Statement of Financial Position?
A summary of the financial position of an enterprise on a specific date, showing how capital is invested in assets and where it comes from (equity and liabilities).
What are the two main sections of the Statement of Financial Position?
The asset side (capital invested in assets) and the equity and liability side (sources of capital).
What are the two types of assets in the Statement of Financial Position?
Non-current assets and current assets.
What are non-current assets?
Assets used for a long period (usually more than one year), often part of the fixed infrastructure of the enterprise.
What is “PPE at cost price”?
Physical assets such as property, equipment, and vehicles shown at their original purchase price.
What is accumulated depreciation?
The total depreciation accumulated on PPE, reflecting how much value has been depreciated over time.
How is PPE at carrying value calculated?
By subtracting accumulated depreciation from PPE at cost price.
What are intangible assets?
Non-physical assets like goodwill and patents that are still valuable for generating income.
What are current assets?
Assets used for a short period (less than one year), easily converted into cash or part of production, like inventories, trade receivables, and cash.
What is equity in the Statement of Financial Position?
Capital provided by shareholders, including ordinary share capital, reserves, and preference share capital.
What are ordinary share capital and ordinary shareholders’ equity?
Ordinary share capital is the proceeds from selling ordinary shares, while ordinary shareholders’ equity includes their total shareholding (share capital and reserves).
What are non-current liabilities?
Long-term debt capital that must be paid after more than one year, such as long-term loans and mortgage loans.
What are current liabilities?
Short-term debt capital that must be paid within one year, including trade payables, bank overdrafts, and short-term loans.
What are the characteristics of ordinary shares?
Ordinary shareholders have voting rights, share in profits via dividends, limited liability, pre-emptive rights, and can benefit from capital gains.
What are preference shares and their types?
Preference shares offer fixed dividends and priority over ordinary shares. Types include cumulative, non-cumulative, participating, convertible, and redeemable preference shares.
What is a cumulative preference share?
A share where unpaid dividends accumulate and must be paid when funds are available.
What are the three main sources of capital in the equity and liabilities section?
Shareholders’ equity, non-current liabilities, and current liabilities.
What is a redeemable preference share?
A type of preference share that will be repurchased by the company at a specific future date at its par value.
What is the first prerequisite for financial statements to be useful in fundamental analysis?
Financial statements must be relevant and contain the necessary information required.
Why must financial statements be understandable?
So that the users of the financial statements can interpret and use the information effectively.
What is required for financial statements to be considered reliable?
The information in the statements must be reliable and complete.
How should financial statements represent the enterprise’s financial situation?
Financial statements must provide an objective representation of the enterprise’s financial situation.
Why is it sometimes difficult to provide an objective representation of certain items in financial statements?
Items like trade receivables and inventory values may involve subjective interpretations, which can differ from person to person.
Why must financial statements be timely?
Timely financial statements ensure the information is up-to-date and valuable for fundamental analysis.
What is the importance of comparability in financial statements?
Financial statements must be comparable, ensuring that information is handled consistently, allowing for effective comparison between different enterprises.
