Module 2 Flashcards
what are the major objectives of financial statements?
- assess liquidity
- assess past performance to indicate future performance
- assess operation efficiency
- predict bankruptcy / failure
primary users of FS?
equity investors
credit granters
mgmt
secondary users of FS?
- employees
- acquisition and merger analysts
- auditors
- SARS / tax authorities
time series techniques?
- comparative/trend FS (directly comparing years)
- index analysis (uses a base year to compare)
cross section techniques?
- common size analysis (% of sales)
- financial ratio analysis
what does FRA do?
- express the relationship between two or more line items if it is a meaningful relationship
- highlights the important fin characteristics of an enterprise by comparing ratios against a benchmark
benchmarks used for FRA comparison?
- previous years
- similar companies of the same size
- av industry standards
what is deferred tax?
it is an interest free liability
solvency ratio formula?
TA:TL
do assets exceed liabilities
what do liquidity ratios do?
reflect/evaluate the ability of a firm to convert its CA to cash and use the cash to settle CL (settle short term debts)
what do financial leverage ratios do?
examine the cap structure of the company and determine whether it made efficient use of debt to create wealth
what does the debt ratio indicate?
the % of total assets financed by debt
adv and disadv of a decrease in debt?
- we forgo the adv of debt to lever up returns to SH and benefits
- decreases exposure to risk
what does the times int earned ratio measure?
the ability of the bus to pay interest from NPBIT
what does the cash coverage ratio show?
the ability of the bus to pay int from op CF (more reliable)
what does the CF to debt ratio show?
CF from ops / total debt
shows the firm’s ability to generate sustainable CF from normal op activities
what is profit?
the primary measure of overall success of a comp’s normal operating activities
what causes a dec in gross margin?
- lower prices
- incorrect mix of inv
- inc in COS
what causes a dec in net operating margin?
- dec selling price
- inc COS
- inc operating exp
what does the return on total assets do?
evaluates the use of assets to generate income
what is ROE?
the overall measure of the financial success of the firm with respect to inc SH wealth
what do markets ratios do?
evaluate the performance of the share price on the JSE based on the firm’s past and expected future performance
what is the dividend/income yield?
cash returns SH earn on their inv
(DPS/market price per share) x 100
return to shareholder / holding period return?
[ (P1 - P0) + DPS / P0 ] x 100
what is return to shareholder / holding period return?
the overall return to SH including cap appreciation and dividend of the share
what is headline EPS?
- primary measure of comp performance
- measures profitability from class A SH view
what is the dividend cover?
number of times divds can be paid out of earnings
headline EPS / DPS
what does high div cover mean?
large % of earnings are retained within the firm to finance future growth plans
what is the payout ratio?
% of earnings paid out as divs
DPS / headline EPS
what does retention ratio evaluate?
amount of earnings are retained within the firm to finance future growth plans
what does the price-earnings ratio measure?
how many times share price covers EPS
what does high/low P/E ratio mean?
high = high future growth prospects and earnings low = risky inv
what is the sustainable growth rate?
the maximum rate the firm can grow without any external financing (maintains d/e ratio with no added leverage)
what influences sustainable growth rate?
- net margin, TAT, financial policy (debt use)
- dividends policy
what if a company wants to grow at a rate bigger than SGR?
- inc long term borrowing (more risk, more int pmts). assumes borrowed money will earn a return in excess of cost.
what is the ROE through Du Pont analysis?
net margin x TAT x equity multiplier
how to improve our ROE through net margin?
inc sales, dec COS, dec op exp
how to improve our ROE through TAT?
make efficient use of assets
how to improve our ROE through equity multiplier?
use debt to lever up returns to SH
