Ratio Analysis Flashcards
What does ROE measure?
An organisation’s overall performance and shows the earning power of the shareholders’ book investment
What can a higher ROE indicate?
Good cost control or investment in profitable projects
When is ROE particularly useful?
Comparing companies in the same industry
What is financial gearing?
The degree to which a company’s activities are funded by borrowed funds as opposed to shareholders’ funds
What is operational gearing?
The effect that fixed costs have on the relationship between sales revenue and operating profits
What happens when operational gearing increases?
Profits become more volatile compared to changes in sales
If operational gearing is high?
A small percentage change in sales revenue will have a much greater percentage in operating profits
What are ivnestors looking for in EPS?
A company to sustain its earnings in order to pay dividends and reinvest for future growth, and to grow EPS year-on-year
Issue with EPS
Can be manipulated through accounting policies or by mergers and acquisitions
What are convertible debt and share options
Securities in issue which involve an obligation to issue shares in the future
What does PE ratio provide?
A useful measure of the relative worth of a share
What is dividend coverage ratio?
An estimate for investors of the risk of not receiving dividends
What is dividend payout ratio?
Gives investors an indication of how much money a company returns to its shareholders compared to how much it keeps to reinvest in growth, pay off debt and add to cash reserves
What is dividend yield?
Tells an investor the percentage of a company’s share price that it pays out in dividends each year
Why do investors use earnings yield?
Assess the rate of return on their investment
