Session 8

Question 1

ROE

Answer 1

Return on equity:
net income/common equity
Basically how much money they’re making for the shareholders

Question 2

DuPont analysis

Answer 2

Basically if you can figure out which ones, are driving the rerun on equity, it can tell you the future direction of the company

Question 3

NOPAT

Answer 3

net operating profit after tax
=net profit - net investment profit after tax + interest expense after tax
- core part of the business

Question 4

NIPAT

Answer 4

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

Question 5

RNOA

Answer 5

Return on net operating assets

= (NOPAT / revenue) x (revenue / net operating assets)

Question 6

Common size approach

Answer 6

Margins ALL relate to Revenue (sales)

Question 7

Gross profit margin

Answer 7

Net operating profit b4 tax divided by revenue so NOPAT. Is calc from net profit divided by revenue + net profit Margin

Question 8

Difference between NOPAT margin and net profit margin

Answer 8

NOPAT adding back the interest expense case

Question 9

Operating working capital turnover

Answer 9

Rev / operating working capital

Question 10

Trade receivables turnover

Answer 10

Rev / trade receivables

Question 11

Inventories turnover

Answer 11

COS / inventories

Question 12

Trade payables turnover

Answer 12

Purchases / trade payables

COS / trade payables

Question 13

Days receivables

Answer 13

Trade receivables/average revenue per day (revenue/360)

Question 14

Days inventories

Answer 14

Inventories/average COS per day

Question 15

Days payables

Answer 15

Trade payables / average purchase per day

Trade payables / average COS per day

Question 16

Current ratio

Answer 16

Current assets / current liabilities

Question 17

Quick ratio

Answer 17

Cash + equivalents + trade receivables (net) / current liabilities

Question 18

Cash ratio

Answer 18

Cash + equivalents / current liabilities

Question 19

Operating cash flow ratio

Answer 19

Cash flow from operations / current liabilities

Question 20

Liabilities-to-equity ratio

Answer 20

Total liabilities/shareholders equity

Question 21

Debt-to-equity ratio

Answer 21

Current debt + non-current debt / shareholders equity

Question 22

Debt to capital ratio

Answer 22

Current debt + non-current debt / current debt + non-current debt + shareholders equity

Question 23

Interest coverage

Answer 23

Profit or loss + interest expense + tax expense /

Interest expense

Question 24

Interest coverage (cash flow basis)

Answer 24

Cash flow from operations + interest paid + taxes paid / interest paid

Question 25

Solvency

Answer 25

Is the business going to continue for the foreseeable ?

Question 26

Debt position

Answer 26

Looking at the ability of the company to pay back its liability position

Question 27

Sustainable growth rate formula

Answer 27

Return on equity * retention ratio

Net income / average equity * (100% - dividend /EPS)

Question 28

Sustainable growth rate

Answer 28

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

Question 29

Freecashflow

Question 30

Key analysis Qs

Answer 30

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?

Question 31

Consensus forecasting

Answer 31

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