L_everage ja G_rowth _analyysi

Question 1

EPS

Answer 1

Earnings per share

EPS = Earnings / Weighted average number of shares outstanding

Question 2

Mitä IAS 33.10 sanoo, että miten EPS pitäisi laskea?

Answer 2

Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period.

Question 3

Name 3 per share ratios

Answer 3

1. BPS (not IFRS regulated)
2. EPS
3. DPS (not IFRS regulated)

BED

Question 4

DPS

Answer 4

Dividend per share

DPS = Total dividends paid / Weighted average number of shares outstanding

Question 5

BPS

Answer 5

Book value of equity per share

BPS = Book equity / Weighted average number of shares outstanding

Question 6

What are the pros and cons of per share ratios?

Answer 6

PRO:
Per share figures provide tools for simple analysis and comparison between firms and over the history of a firm.

CON:
BUT, they do not provide the full picture.

Question 7

What is Financial leverage?

Answer 7

Financial leverage is the use of debt to buy more assets. Leverage is employed to increase the return on equity.

TOISIN SANOEN:
Financial leverage referes to the debt-equity mix.

Question 8

What are the risks related to high degree of leverage?

Answer 8

An excessive amount of financial leverage (debt) increases the risk of failure, since it becomes more difficult to repay debt.
–> Interest payments need to be paid even in the recession period.

Increased financial risk increases the volatility of earnings.

Question 9

Name 3 measures of financial leverage?

Answer 9

1. Gearing (Net Debt)
2. Equity ratio (Equity to Total Capital)
3. Debt to Sales

Question 10

How do you calculate gearing?

Answer 10

GEARING = Net interest-bearing debt / Equity

Net interest-bearing debt in numerator:

• Interest-bearing debt minus financial assets
• A firm can pay back its debt by using financial assets
• ’Debt does not create financial risk, if it can be paid back anytime’

Equity in denominator

Gearing can be calculated using

• Average of the opening and closing balance sheet items or
• Closing balance sheet items

Question 11

What equity ratio measures?

Answer 11

Equity ratio is a direct measure of the debt-equity mix of the firm

Question 12

How do you calculate equity ratio?

Answer 12

Usually, it is calculated as follows (without time subscripts):

Equity ratio
= Equity / (Debt+Equity)
= Equity / (Total assets)

The Finnish practice (YTN) is to deduct advanced payments from total assets.

Question 13

YTN?

tätä ei tarvitse koetta varten, mutta että ei häiritse :D

Answer 13

YTN = Yritystutkimusneuvottelukunta

Question 14

Equity ratio normaalisti ja using Finnish practice?

Answer 14

Equity ratio = Equity / Total assets

FINNISH PRACTICE:
Equity ratio = Equity / (Total assets - Advanced payments)

Question 15

Debt-to-sales ratio

Answer 15

Combines I/S and B/S items.

Is calculated as follows (without time subscipts):

Debt to sales ratio = Debt / Sales

• Debt sisältää current and noncurrent liabilities
• The Finnish practice (YTN) is to deduct advanced payments from debt.

Question 16

Debt-to-sales ratio NORMAALISTI ja FINNISH PRACTICE?

Answer 16

Debt-to-sales = Debt / Sales

FINNISH PRACTICE:
Debt-to-sales = Debt - Advanced payments) / Sales

Question 17

What is the relation between Growth and Value creation?

Answer 17

Growth of the firm must create value –> meaning that ROIC > WACC!

TÄRKEÄ –> Not all growth creates value:

• Acquisition of other firms that have low profitability, low margins etc.
• Acquisition of other firms at a too high price
• Capital expenditures with too low net present value.

Question 18

Can you name Indicators of value-creating growth?

Answer 18

A) EPS, DPS, BPS growth.
B) Revenues and earnings growth.
C) Margins remain stable or even grow, but do not decline.

Question 19

Is growth sustainable?

Answer 19

It is rare that high sales growth can be maintained in the long-run.

Yleensä aluksi sales growth (%) on tosi suuria (tai tosi negatiivisesti suuria) ja sitten ajan mittaan se tasoittuu ja kasvu on vaan ihan pientä prosentuaalisesti. Sales growth tends to gravitate towards mean.

Question 20

Financial leverage can be used to boost ROE, but what increases?

Answer 20

Financial leverage can be used to boost ROE, but at the time, risks increase.