Measuring Retuens To Shareholders Flashcards
What can a company use to give a snapshot of its short-term financial performance?
Use a “Ratio Analyses”
What is ROCE?
Return On Capital Employed.
ROCE shows the return generated to all investors, including those who have just lent money to the company.
What is Capital?
The total amount of “long-term finance” committed by investors.
Such as:
- long term debt finance
- preference share (pay a fixed dividend)
- ordinary shares (equity finance, pays a variable dividend)
What are the two ways ROCE measures a company’s current success? What are the two formulas used?
- By relating the amount of profit to the value of the resources employed in generating the profit, which reflects the efficiency with which the resources have been used.
[Operating Profit/(Long term debt + Equity)] x 100
- How the long term finance has been invested, i.e.e the assets that have been purchased (long term or short term), net the short-term liabilities.
[Operating profit/(Total assets - current liabilities)] x 100
Define “Operating Profit”.
Profit before interest and tax
Define non-current liability vs current liability.
Non-current = long term debt
Current - short term debt
How is Capital calculated?
- Long term debt (non-current liability) + Equity
2. - Total assets - short term debt (current liabilities)
What is EPS?
Earnings Per Share
What does EPS show?
The maximum dividend that could be paid to the owners of the business (ordinary or equity shareholders) out of that years profit after all payments have been made to the providers of the finance (banks or preference shareholders).
EPS shows only the returned earned by ordinary shareholders.
How is EPS calculated?
EPS = [Profit after interest,tax and preference dividend]/[Number of issued equity shares]
How can risks be classified?
- Systematic Risk, market sector risk
2. - Unsystematic Risk, individual company risk
What is “cost of equity”?
The return expected by shareholders, and can be used to assess whether the level of return is acceptable to shareholders.
How is Equity Investment calculated?
EI = share capital + retained earnings
Define “free cash flow to equity”
The cash flows generated by an business in a particular year after interest and tax and investment spending..
Free cash flows to equity are available either to pay as a dividend or to keep within a business.
How do you go about the process of “discounting” shares based on future cash flows?
I.e. Calculate the share price for a company based on future cash flow potentials
Year 1:
Discounted future cash flow to equity = free cash flow to equity/(1+required rate of return %)
Year 2:
Discounted future cash flow to equity = free cash flow to equity ÷ (1+required rate of return %)˜2
Year 3:
Discounted future cash flow to equity = free cash flow to equity ÷ (1+required rate of return %)˜3
Total value = Year 1 + Year 2 + Year 3
Price per share = Total value ÷ No. of shares
