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ratios Flashcards

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1
Q

what are the annual reports?

A 
auditors
directors
income statement
balance sheet
cash flows statement
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2
Q

who are the users and what are their associated objectives of annual reports

A

equity investors - return in capital invested, capital preservation and growth
credit grantors - short term: interest cover, repayments of amounts owing; long term: (banks), interest cover and capital preservation
management - decision making and planning and control
employees - job security, career prospects, wage and salary negotiations
acquisition and merger analysts - valuation of potential candidates
auditors - analytical review
SARS - income fairly states

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3
Q

what are the two main approaches to financial analysis

A

time series techniques
cross section techniques
economic value added ** where do we info?

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4
Q

what is time series techniques? explain

A

comparative(trend) financial statements: direct comparison of current statements to numerous prior years’ statements to detect trends in key variables
common size analysis

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5
Q

what is a index analysis example? explain

A

similar to comparative method but a base year is used to express values are percentages for sufficient comparisons
selecting the base year can be problematic

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6
Q

common definition of debt

A

interest bearing liability

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7
Q

debt to equity ratio

A

interest bearing debt*100/equity –> how much of your

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8
Q

what is deferred tax

A
  • this should the treated as interest free liability
  • if there is a deferred tax asset, treat it as a non current asset
  • sometimes the nature of the analysis requires that deferred tax be treated as equity
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9
Q

what can be used as appropriate benchmarks for financial ratio data

A

previous years ratios
similar companies of similar size
industry average standard
average ratios of leading companies in the same industry
target budgets
ratios can identify and highlight areas of good or bad financial performance and areas with significant changes

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10
Q

what is the et asset value per share ratio and what does it tell us?

A

net asset value (equity) / no shares in issue

the asset value of the share

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11
Q

what do liquidity ratios reflect

A

the ability of the firm to settle its short the debts - ability of the firm to convert its current assets into cash and replay current liabilities

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12
Q

who are the primary users of liquidity ratio?

A

creditors

short term loan lenders? google some more

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13
Q

what is the current ratio and what does it tell us>

A

evaluates the ability of the firm to settle short term debts from the conversion of all current assets to cash

current assets/current

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14
Q

what is the asset test ratio and what does it tell us?

A

evaluates the ability of a firm to settle short debts without relying on the sale of inventory - only relies on cash and debtors

current assets-inv/current liabilities

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15
Q

what is the days inventory on hand and what does it mean

A

time period between purchase and sale of inventory

inven*365/cost of sales

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16
Q

what is the inventory turn over ratio and what does it mean

A

average number of times inventory is sold during the year

cost of sales/inventory

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17
Q

what is the accounts receivable days collection period ratio and what does it mean

A

average days between credit sales and when the cash is collected from debtors
TR*365/credit sales

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18
Q

what are the advantages and risks when increasing and decreasing the collection period

A

increasing - sales may increase accrual profits, bad debts increase
decreasing - cash flows increase, bad debts decrease

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19
Q

what is the accounts payable days collection period and what does it mean

A

average number of days between the credit purchases and when the cash is paid to creditors

TP*365/cost of sales

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20
Q

how could we improve the acc payable days collection period

A

increase payment period as long as it is in credit terms

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21
Q

what do the asset turn over ratios indicate

A

management of things

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22
Q

what is the total asset turn over ratio and what is it used for

A

evaluates the use of all assets to generate revenue

revenue or sales/total assets at cost

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23
Q

what is the fixed asset turnover ratio and what is it used fot

A

evaluates the use of fixed assets to generate income
how efficiently NCAssets are being used
revenue or sales/fixed assets at cost

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24
Q

what are the financial leverge ratios used for

A

examine the financing/capital structure of the businss
determine whether the business made efficient use of debt leverage to create wealth
interest tax shield benefit
as more debt is take on the costs of bankruptcy will begin to outweigh the tax shield benefits until an optimal debt/equity level is encountered

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25
Q

what is the debt ratio and what is it used for

A

percentage of total assets financed by total debt

total debt*100/total assets

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26
Q

is a decrease in debt finance good or bad?

A

good - decreases exposure to financial risk - interest and capital repayments
bad - forego the advantage of debt to lever up returns to shareholder and benefits of interest tax to shield from tax expense

27
Q

what is the debt to equity ratio (non interest and interest)

A

indicates that for every R1 of capital that is provided by shareholders, x cents is provided by all liabilities

the higher this ratio the greater the exposure to financial risk

total debt/total equity

28
Q

debt to equity ratio interest only

A

indicates for every R1 that is provided by equity, x cents is provided by interest bearing debt

interest bearing debt* 100/total equity

29
Q

what is the times interest earned ratio and what is it used for?

A

measures the ability of the business to pay interest from accrual net profits before interest and tax or the amount of times net profit before interest and tax covers interest expense

measure of degree of safety available to the lenders- a firms cash flow pays interest not accrual profits

operating profit before interest and tax/interest expense

30
Q

what is the cash coverage ratio and what is it used for

A

reflects the business ability to pay interest from the operating cash flows

Earnings before interest, tax, depreciation and amortization/interst expense

31
Q

what is amortization

A

depreciation in intangiables

32
Q

what is the cash flow to debt ratio and what does it do

A

provides insight into the cash flows from operations to repay debt - shows the % of total debt that is covered by the net cash flow from operations (after deducting interest, tax and dividends paid)

cash flow from operations/total debt

33
Q

what is profitability and what do the profitability ratios tell us?

A

profit is the primary measure of overall success of a company’s normal operating activities

to assess the financial performance as a percent of some level of activity or investment

34
Q

what is the gross margin on sales ratio

A

calculates the amount that is left from every R1 of sales after deducting the cost of sales expense
the amount left to pay operating expenses and Profit

gross margin*100/revenue or sales

35
Q

what could increase the gross profit margin

A

higher prices
decrease cos expe
correct mix of inventory
fifo and moving weighted average

36
Q

what is the net operating profit ratio

A

expresses the net profit before taxes and interest as a percentage of the total sales (for every R1 earned - x% was net profit before taxes)

net profit before tax and interest/sales or revenue

37
Q

how to increase net operating margin

A

increase selling prices
decrease COS
decrease operating expenses

38
Q

what is the net profit on sales after tax ratio

A

expresses the net profit after taxes and interest as a percentage of the total sales (for every R1 earned - x% was net profit after taxes)

net profit after tax/sales

39
Q

what is the return on assets ratio ebit

A

earnings before interest and tax/total assets at cost
evaluates the use of all assets to generate income before interest and tax

for every R1 invested in total assets, the firm earned X cents in profit before interest and tax

earnings before tax and interest/total assets at cost

40
Q

return on total assets after interest and tax

A

evaluates the use of all assets to generate income after interest and tax

for every R1 invested in total assets, the firm earned X cents in profit after interest and tax

earnings after tax and interest/total assets at cost

41
Q

what is the return on equity ratio

A

the overall measure of the financial success of the firm with regards to increasing the shareholder’s wealth

net profit after tax/shareholders equity

42
Q

explain the purpose of the investment performance ratios

A

evaluates the performance of the share price on the JSE based on the firms past and expected performance and the resulting implications for the sharehoders

relate the current market share price to an indicator of return such as dividents and earnings

examines the relationship between share price dividends and earnings

43
Q

what is the dividend yield ratio

A

for every R1 x cents is made - the percentage of the rand that is paid back to cash return shareholders in the form of dividends

dividend per share/market price per share

total yield would include dividends and capital appreciation

44
Q

what is headline earnings per share?

A

primary measure of company performance
measures profitability from the perspective of ordinary shares

headline earnings/number of ordinary shares in issue

45
Q

what are headline earnings?

A

Headline earnings are a measurement of a company’s earnings based solely on operational and capital investment activities.

46
Q

what is the dividend cover ratio

A

how many times dividends can be paid out of current year’s earnings

headline earnings per share/dividend per share

47
Q

what does it mean to have a high dividend cover ratio?

A

large percentage of earnings are retained within the firm to finance growth

48
Q

what does it mean if the div cover ratio is less than 1

A

that the current year’s earnings are not enough to cover the dividend payouts of the current year

49
Q

what is the payout ratio?

A

percentage of earnings NPAT that is paid out as a divident to share holders

dividends per share/headline earnings per share

50
Q

what is the retention ratio

A

how much of the profits are retained in the business

1-payout ratio or

(earnings per share - dividends per share) * 100 /earnings per share

51
Q

what is npat

A

net profit after tax

52
Q

what is the return to share holder ratio

A

overall return to shareholder - capital appreciaion and dividend

p1-p0+dividends / p0

53
Q

what is the price earnings ratio

A
  • measures how many times the share price covers the headlines earnings per share
  • amount that investors are willing to pay for each R1 of reported profits
  • the markets view of the future earnings potential of the company

market price at year end/headline earnings per share

54
Q

high vs low price earnings ratio

A

high - high future growth prospects

low - risky investment

55
Q

what is the earnings yield ratio

A

yield that investors are demanding on their investments
inverse of price earnings ratio

earnings per share *100/market price per share

56
Q

what is the market value added

A

MVA = MV of stocks - Book value of stockholders’ equity

market capitalizatio-[total equity - non controlling interest]

57
Q

what does a negative MVA mean?

A

market value less than book value

58
Q

what is the mva per share

A

mva/number of shares issued

59
Q

what is market price to book?

A

market price at end of year/NAV per share(book value per share)

60
Q

market price to book using market capitalization

A

shows the value that the firm has generated for each R1 invested by shareholders

market cap/equity(net of NCI)

61
Q

what is the sustainable growth ratio?

A

maximum rate at which a firm can grow without any external funding

ROEretention ratio100

62
Q

factors that affect a firm’s ability to sustain its growth

A

from ROE:

  • net margin (operating efficiency)
  • total asset turn over(efficient use of assets
  • financial policy (use of debt: equity multiplyer)

dividend policy:
- if the company pat low divs then the retention ratio would increase which would then lead to an increase in the sgr

if the company wants to grow at a greater rate than sus growth ratio:
- increase long term borrowing

63
Q

what is du point analysis?

A

uses: net margin, total asset turnover, equity multiplier(total A/ total E) ratios – multiply these ratios together to get ROE

Finance (12 decks)

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