Unit 3 - Topic 2 Flashcards
4 points - Sections in the financial statements?
Profit and Loss Account - revenue & expenses
Balance Sheet - assets, liabilities & shareholders funds
Cash Flow statement - operating activities
Explanatory Notes - greater detail
What are small companies not required to produce?
Cash Flow statements
3 points - What are the 2 out of 3 things to classify as small company?
Less than £6.5m turnover
Less than £3.26m total assets
Less than 50 employees
3 points - What does the Balance Sheet tell us?
How much the company is worth
How healthy it is
How much shares are worth in relation
2 points - How to check if the company is solvent?
Balance sheet helps you work out if they will be around this time next year
Liquidity ratio as companies go bust because of no money
2 points - What is liquidity ratio
Current assets divided current liabilities
Less than one is cash crunch
2 points - Acid test ratio calculation and why?
Current assets (less stock) divided current liabilities As stock can't be sold quickly in times of trouble
2 points - What is NAV or capital employed?
Net Asset Value = Total assets - total liabilities
Shows how much a company is worth according to balance sheet
3 points - Results of NAV per share and calculation?
Net asset Value divided by shares
If NAV per share is higher than stock share price it could be bad news ahead
If NAV per share is lower than stock share this could mean good news ahead as they are expecting more profits than they are showing
2 points - What period is the Balance Sheet and P&L?
Balance Sheet is a snap shot of a given day
P&L is over a period of time either quarterly, half or full year
3 points - How to know how much a company is making?
Turnover is the value of sales
Gross profit is Turnover minus cost of sales
EBITDA
2 points - What is Depreciation and Amortisation
Depreciation is falling of the value of fixed assets e.g. machinery
Amortisation is falling of the value of intangible assets e.g research, trademarks
3 points - What is the cash flow statement
How much money running through the business from operating activities - net cash
Operating profit minus non business activities e.g. dividends, interest for finance
Money from financing e.g loans or money from shares being sold
3 points - What does operating profit exclude?
Depreciation
Amortisation
Exceptional items (revaluation for example)
What liability does a Partnership have compared to a limited company?
Unlimited liability for a partnership
Limited company has a liability to what they agree to invest e.g. shares
2 points - What is gearing results and calculation?
total capital employed
50% or higher is high gearing
20% or less is low gearing
But depends on the business
3 points - Benefit of high gearing
Less capital required by shareholders to be invested
Debt can be a relatively cheap source of finance compared to dividends
Easy to pay interest if profits and cashflows are strong
3 points - Benefits of low gearing
Less risk of defaulting on debts
Shareholders rather than debt providers call the shots
Business has the capacity to add to the debt if required
Operating profit margin?
Operating profit divided Turnover
3 points - Operational Gearing what is it?
Analysis of fixed costs High operating (fixed) costs is described as having high operational gearing. Low operating (fixed) costs is described as having low operational gearing.
2 points - Operational Gearing results from increased Turnover?
High Gearing = Increase in Operating profit margin
Low Gearing = Decrease in Operating Profit margin
2 points - What is the Breakeven point?
Selling Price - Variable Costs
When total costs are exactly the same as total sales neither a profit or loss
What is the margin of safety?
The extent to which the planned volume of output or sales lies above the breakeven point.
Calculating Revenue?
Sales price x units
3 points - Limits of using ratios for business analysis?
Limited if used in isolation as they have a limited perspective
No such thing as a good or bad ratio as it is highly subjective
Reliability as it is from a single point in time - such as year end
2 points - Name ratio categories?
Working capital ratios - Cash pressure in the business
Capital Management ratios - How well they are managing their assets to produce sales
4 points - Working capital ratios?
Trade Debtor days - how long the customers take to pay
Trade Creditor days - how long they take to pay suppliers
Stork Turnover days - how long business holds on to stock
Calc - X divided by Turnover x 365
Current ratio - How cash is covered by liabilities in next 12 months
Current liabilities
4 points - Capital Management Ratios?
Asset Turnover - How well the assets are being used for sales
(Turnover divided by net assets)
PBIT (Profit before interest and tax) - Measures profit after all expenses
(Turnover - total expenses and interest and tax)
EBITDA - Measure of business operating performances without factoring accounting treatment and accounting decisions
(PBIT - Depreciation and Amortisation)
ROCE - Ratio that is the amount of profit that can be attributed tot he shareholders of the business
Operating profit
———————– x 100
Total Capital & reserves
5 points - What is the business flow before cash is generated? Referred to as the funding gap
1) Stock is purchased
2) Stock is stored. or converted to finished goods
3) Products are sold to the consumer on credit terms
4) Invoiced debtor are passed to the collections
5) Invoices are paid and converted to cash
4 points - Result of all working capital ratios if they are high?
Trade Debtor days - More pressure on the business cash flow (if too high bad debt likely)
Trade Creditor days - Less pressure on business cash flows but too high could mean suppliers remove credit lines
Stock turnover days - Means more pressure on cash flows and could mean stock piling of obsolete stock
Current ratio - Means the business is better able to pay back liabilities
4 points - Result of all capital management ratios being high?
Asset Turnover - Means assets are being utilised efficiently
PBIT - Means more cash is in the business available to settle creditors useful if low relative depreciation and amortisation
EBITDA - Means more cash in the business but useful if they have relatively high relative depreciation and amortisation
ROCE - Better return for the shareholders
2 points - Liquidity?
A measurement of a company’s ability to pay its short-term debts.
The three common liquidity measures are current ratio, acid-test ratio and cash ratio.
3 points - Why is Profit not equal to cash?
Operating activities - selling goods on credit
Financing actiivites - Loans, etc
Investing activities
8 points - Sections to the cash flow statement?
Inflow from operating activities Returns on investment and finance costs Purchase and sale of assets (net) Acquisition and disposal of businesses Dividends paid Purchase/sale of shares Repayments of finance lease Net increase or decrease of cash
How can serviceability of debt be measured?
Look at Ratio analysis
2 points - What is CFADS and how is it calculated?
Cash flow available for debt service
EBITDA as a baseline
less dividends tax paid and net capital expenditure.
Plus or minus working capital (i.e. net changes in stock, debtors and creditors).
This end figure is then compared with the repayments required for a decision or annual debt service cost to see if it is a surplus or deficit
4 points - When did automated credit approvals start and how do they operate?
1980s
Business rules engines - organised by the funder to reflect their credit policies
CRA searches
Automated analysis of customer financial data (approve, decline or refer to manual underwriter)
Post financial crisis what was citied as a barrier to entry
Challenger banks do not have access to levels of CRA like the big four
5 points - ABCFG of credit scoring?
Application scoring Behavioural scoring Customer scoring Fraud Scoring Generic Scoring
Broker benefit of auto approval?
Quicker decision
4 points Funder benefit?
Improved customer service levels
Customer retention better
Reduced credit staff costs
Ability to quickly amend credit policy rules (respond to economic environment changes or requirement to change asset or industry mix of their portfolio)
3 points - Issues to resolve involving technology in asset finance
Development of robust and secure mobile/tablet solutions
Development of cloud based solutions
Increased need for cyber security for protection of customer data
