Industry Analysis (Section C) Flashcards
Which businesses have high assets?
Manufacturing businesses, service businesses have low assets
Do manufacturing businesses have high depreciation?
Yes
Which businesses have high inventory?
Manufacturing businesses, service business have less inventory
Which businesses have a high cost of sales?
Manufacturing
Comparison of entites in two periods?
Change in product mix, receivables and payables
Acquisition of major new PPE
DIsposal of PPE
Change in product mix cause?
New competitors entering the market or because of changes in societal demands
Change in receivables?
New customers are gained or existing customers must be offered extended redit terms
Change in suppliers?
New suppliers are being used to fulfil changes in product mix
Acquisition of new PPE affects?
Asset turnover
Operating profit margin (because of depreciation)
ROCE
When is the financing of new asset important?
If cash, this affects cash flows
Affects interest cover if acquired through lease or a loan
What does gain or disposal in asset result in?
A gain or loss on disposal which has impact on operating profit margin
Asset turnover
ROCE
One off events when comparing one entity over same period?
An impairment loss which increased expenses and therefore reduced operating profit margin
When comparing two entites in the same period?
Whether there are any differences in accounting policies
What is a key reason for return on assets or return on equity differences?
Accounting for non-current assets at cost vs fair value
Comparison of entity with sector averages?
Firms may have different year-ends which could skew the comparison
Seasonal trade and the affect on sector averages?
Receivables and inventories balances at year end
What must discussion focus on in consolidation?
The acquisition exclusively
Acquisition discussion points (margins)
Acquired subsidiary might have different margins or operate at a different sector
Acquisition discussion points (intra-group)
Some transactions such as intra-group sales or unrealised profit must be eliminated
Acquisition discussion points (fees)
One-off fees related to the acquisition
Acquisition discussion points (subsidiary acquired)
The subsidiary acquired may have different payment terms for receivables and payables
Acquisition discussion points (gearing ratio)
Shares issued to acquire subsidiary may impact the gearing ratio
Acquisition at start of year?
There is consistency between CSPLOCI and CSFP
Acquisition at mid year?
False impression of receivables collection period
Since CSPLOCI includes results post-acq and CSFP includes all assets and liabilities
Acquisition at end of year?
Skews ratio which increase in assets and liabilities
Increase in assets and liabilities but not the profits
Mid-year disposal in consolidation?
CSPLOCI contains results of subsidiary up until date of disposal whereas CSFP not contain any assets or liabilities of subsidiary since it has been disposed
How to analyse statement of cash flows?
Look at operating activities, investing activities and financing activities
Cash flow from operaitons source?
How much cash the business can generate from its core activities
If a company offers 60 days instead of 30 days credit terms (cash flows)?
Cash sales will decrease as the company is collecting less cash
Cash flows from investing source?
Are one-off items
A reason for the entity increasing investing activities but performing bad?
Forced to sell assets and rent then back to generate cash flows to allow to continue to trade
Cash flows from financing source?
Are one-off items
An example for financing activities?
A new loan increases cash, great if proceeds are used to invest in new assets, negative if proceeds are needed for company to continue trading
Potential interest of shareholders?
Performance of management during the year
Decision to buy, hold or sell shares
Potential interest of investors?
Future growth and profit potential
Investment decision
Potential interest of banks and capital providers?
Ability to pay existing interest and loan capital
Decision whether to grant further loans
Potential interest of employees?
Company stability as an employer
Wage negotiation
Potential interest of management?
Weak performing areas that need attention
Whether targets met
Potential interest of suppliers?
Creditworthiness as a customer
Potential interest of government?
Statistics
Decision whether to award a grant
