Session 8 Flashcards
ROE
Return on equity:
net income/common equity
Basically how much money they’re making for the shareholders
DuPont analysis
Basically if you can figure out which ones, are driving the rerun on equity, it can tell you the future direction of the company
NOPAT
net operating profit after tax
=net profit - net investment profit after tax + interest expense after tax
- core part of the business
NIPAT
net interest profit after tax
Investment income + interest income (1-tax rate)
To al intents purposes, an investment asset
- non-core part of the business
RNOA
Return on net operating assets
= (NOPAT / revenue) x (revenue / net operating assets)
Common size approach
Margins ALL relate to Revenue (sales)
Gross profit margin
Net operating profit b4 tax divided by revenue so NOPAT. Is calc from net profit divided by revenue + net profit Margin
Difference between NOPAT margin and net profit margin
NOPAT adding back the interest expense case
Operating working capital turnover
Rev / operating working capital
Trade receivables turnover
Rev / trade receivables
Inventories turnover
COS / inventories
Trade payables turnover
Purchases / trade payables
COS / trade payables
Days receivables
Trade receivables/average revenue per day (revenue/360)
Days inventories
Inventories/average COS per day
Days payables
Trade payables / average purchase per day
Trade payables / average COS per day
Current ratio
Current assets / current liabilities
Quick ratio
Cash + equivalents + trade receivables (net) / current liabilities
Cash ratio
Cash + equivalents / current liabilities
Operating cash flow ratio
Cash flow from operations / current liabilities
Liabilities-to-equity ratio
Total liabilities/shareholders equity
Debt-to-equity ratio
Current debt + non-current debt / shareholders equity
Debt to capital ratio
Current debt + non-current debt / current debt + non-current debt + shareholders equity
Interest coverage
Profit or loss + interest expense + tax expense /
Interest expense
Interest coverage (cash flow basis)
Cash flow from operations + interest paid + taxes paid / interest paid
Solvency
Is the business going to continue for the foreseeable ?
Debt position
Looking at the ability of the company to pay back its liability position
Sustainable growth rate formula
Return on equity * retention ratio
Net income / average equity * (100% - dividend /EPS)
Sustainable growth rate
The ability to pay a dividend
100% - dividends are fully covered by your EPS / retention rate will go to one and your sustainable growth rate will default to the return on equity
The higher the retention ratio, the lower the sustainable growth rate wirh be on ROE
Freecashflow
Key analysis Qs
Is the sustainable growth rate of the firm sustainable? Which financial policies are driving it? (Historical data)
Ratio analysis - spot trends - WHY GOING UP/DOWN?
Significant differences between net policies/operating cash flow? Policy change? Rev recognition? Changes in receivables/inventories/payables?
Consensus forecasting
Average of the forecasted EPS for a public company by independent Financial analysts. Investors compare the actual results of a business to foes against - driving decision to invest in / divest from organisation
