Financial analysis Flashcards
If Retained Earnings of a company have dropped dramatically. What are the 3 possible reasons for this?
1) A large dividend was paid
2) The company recognised a loss
3) There was a share buy-back at a premium
NOTE:
1) A profit that has decreased from the prior year will still be a profit, and therefore increase retained earnings.
2) A re-investment in assets will not affect equity – assets are being converted from one type to another.
Management are seeking to expand operations by investing in Plant, Property and Equipment. They have been advised to wait until the start of the new financial year. Discuss why this advice is good from a financial ratio analysis point of view
By waiting until the new financial year, the full impact of the PPE expansion will also be seen in the income statement numbers and the ratios will be more favourable.
The PPE would increase the asset balance but there would not have been enough time for revenue or profits to improve.
What differences would be expected in terms of the Du Pont analysis if a company changed from the cost model to the revaluation model for Plant, Property and Equipment?
The assets and equity would be expected to increase.
The efficiency will be reduced, and the leverage is likely to be reduced, because of the change to both, but the equity increases by a proportionately bigger amount.
The overall effect on RoE is a decrease
Explain why managers are sometimes resistant to preparing segmental reports.
Managers don’t like to give away information about where they are making their margins and their strategies.
Jamo Ltd has a PE ratio of 6. It then announces that headline earnings per share has dropped by 30% compared to the previous year. What is the new PE ratio of Jamo Ltd? (Assume that the share price hasn’t changed)
6/0.7 = 8.57
