Securities Analysis Flashcards
Current and Non-current assets can be further classed as:
Tangible and Intangible
Depreciation applies to what type of asset?
Tangible Non-current assets
Amortization applies to what type of asset?
Intangible Non-current assets
e.g Patents
What types of tangible non-current assets do not depreciate and why?
Freehold land as it does not have a limited economic life.
What is the difference between Authorised share capital and Issued Share Capital
1) Authorised Share Capital: This is the theoretical limit on the amount of share capital that is permitted to be issued,
2) Issued Share Capital: Is the actual amount of share capital in issue at a given time.
What are the three sub-elements of Equity?
Share Capital
Capital Reserves
Revenue Reserves
What are the three types of Capital Reserves?
Capital Redemption Reserves
Share Premium
Revaluation Reserves
How are capital redemption reserve funded?
Through the buyback / redemption of existing shares, using funds from revenue reserves.
How is share premium funded?
The excess from issuing any shares above their nominal value.
How are the revaluation reserves funded?
The unrealised increase in value of tangible and intangible assets.
E.g the value of land / buildings increases but has not been realised through a sale.
How can capital reserves be used?
They can be used to issue bonus shares. These reserves are a sign of financial strength as they indicate additional funds that are not derived from profits but from other financial activities.
What are the two revenue reserves?
Retained Earnings and Minority Interests
What is the formula for equity on the balance sheet?
Share Capital + Reserves
What might be included in the footnotes of financial statements (5 things)
Management Commentary
Stock Benefits
Pension / Employee Benefit Plans
Account Policies
Income Taxes
Why might the statement of profit / loss not match the actual cash position of the firm?
It is calculated on an accrued basis, and counts income / expenditure when it is registered, not when the cash is received / spent.
Under IAS, what are the two acceptable ways of presenting the statement of profit and loss.
1) A comprehensive statement of income
2) Two seperate statements of profi and loss
What is the formula for “Cost of Sales”?
Opening Stock + Purchases - Closing Stock
What is the formula for Gross Profit?
Revenue - Cost of Sales
What is the formula for opertaing profit? (PBIT)
Gross Profit - Operating Costs
What is the difference between revenue expenditure and capital expenditure?
Revenue expenditure immedieately impacts the statement of profit or loss
Capital Expenditure is spending on non-current assets
Charges like Depreciation and Amortization are added back where?
The statement of cash flows
Depreciation and amortization reduce reported profit but do not actually cause a loss, therefore they are added back into the statement of cash flows.
What are the three types of cash flow on the statement of cash flows?
1) Operating Cash Flow
2) Enterprise / Investment Cash Flow
3) Financing Cash Flow
What is operating cash flow?
Cash coming in / out due to everyday business activity
What is investment / enterprise cash flow?
Cash from long term investments - e.g interest, dividends - also covers money spent on long term assets like buildings
What is financing cash flow?
Money spent on paying dividends as well as money gained from issuing shares - minus cash spent repaying debt or buying back shares
What are the two methods of reporting cash flow?
Direct vs Indirect
In simple terms, the direct method shows the actual cash transactions (money in from customers, money out to suppliers and employees), while the indirect method starts with the profit and adjusts it to reflect cash flow, mainly by removing non-cash expenses and considering changes in working capital.
What do liquidity ratios seek to establish?
Whether or not a business can meets its operating requirements from its working capital in a timely manner.
In other words, does it have sufficient ability to raise cash when required, to pay off the liabilities as they fall due?
What is the formula for current ratio, and what does it assess?
Current assets / Current liabilities
Seeks to establish is a company can pay their liabilities falling within 12 months with their assets recoverable within 12 months.
A ratio between 1.2 - 2 is desireable.
What is operational gearing?
A comparison of fixed costs to variable costs
What does it mean to have high opertaional gearing, and what is the risk?
Being highly operationally geared means fixed costs are higher in proportion to variable costs. When sales are strong then profits can grow quickly, however, as sales fall, the costs remain fixed and do not fall in step. This means the costs remain high and profits can fall.
