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Business Management 142 > Chapter 5: Fundamental Analysis > Flashcards

Chapter 5: Fundamental Analysis Flashcards

1
Q

Fundamental analysis

A

Determining the intrinsic value of a company’s shares by considering the current and expected future financial performance of the enterprise.

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2
Q

4 Groups of stakeholders in financial analysis

A
  • Shareholders - Debt capital providers - Management and employees - Diverse groups
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3
Q

Concerns of shareholders

A
  • Ability to generate income - Associated Risk - Earnings and dividends per share
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4
Q

Concerns of debt capital providers

A
  • Amount of debt capital in the enterprise’s capital structure - Ability to meet capital and interest repayments - Focus on solvency and liquidity
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5
Q

Concerns of management and employees

A
  • Info on firm’s financial position ensures efficient internal decision making - Employees are interested in long-term survival ability
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6
Q

Diverse groups concerned with financial analysis

A
  • Customers - Providers of raw materials - Competitors - Governments - Organisations - Stockbrokers
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7
Q

Statement of comprehensive income

A

Provides a summary of an enterprise’s financial performance for a specific period of time.

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8
Q

Turnover

A

All compensation received for products or services provided by the enterprise.

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9
Q

Cost of sales

A

Costs directly incurred in order to generate the turnover. - usually opening inventory plus purchases less the final inventory.

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10
Q

Gross profit

A

Profit realised from the sales activities of the enterprise. Calculated by subtracting the cost of sales from the turnover.

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11
Q

Operating profit

A

An indication of the profit generated from the primary activities of the enterprise. Obtained by subtracting the operating expenses from the gross profit.

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12
Q

Profit before tax

A

Calculated by adding the investment income to the operating profit, taking non-recurring profit and losses into consideration and subtracting finance cost.

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13
Q

Profit after tax

A

Represents the amount available for paying preference dividends. Obtained by subtracting the tax from the profit before tax.

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14
Q

Attributable earnings

A

The portion of the profit - after taxation and preference dividends - available for ordinary shareholders. This can be paid out as ordinary dividends.

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15
Q

Retained earnings

A

The portion of the earnings not paid out as dividends, but reinvested within the enterprise. They become part of reserves.

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16
Q

Statement of financial position

A

A summary of the financial position of an enterprise on a specific date: The capital obtained and the application thereof. Two sides: - assets - equity and liabilities

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17
Q

Assets

A

A capital investment in items, usually with the idea of utilising these items to generate income.

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18
Q

Non-current assets

A

Assets that are utilised for a relatively long time period (1 year +). They are part of the property of the enterprise.

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19
Q

6 Major forms of non-current assets

A
  • Property, plant and equipment (PPE) at cost price - Accumulated depreciation - PPE at carrying value - Goodwill and patents - Investments - Loans granted
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20
Q

Property, plant and equipment (PPE) at cost price

A

All physical non-current assets employed by an enterprise, (i.e. property, equipment, vehicles, buildings, production facilities, etc.). These items are usually shown at their original purchase price.

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21
Q

Accumulated depreciation

A

An indication of the total amount of depreciation that has been provided for on the PPE included in the statement of financial position up to date.

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22
Q

Current assets

A

Assets that are used for a relatively short period of time (less than one year). They are usually included in the physical production process and in most cases easily convertible to cash.

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23
Q

3 Distinctions between non-current and current assets

A
  • Turnover period of capital - Ease of realisation - Physical characteristics
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24
Q

Inventories

A

All stock necessary for the continuous operation of an enterprise.

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25
Trade receivables
Outstanding amounts of credit sales on the statement-date.
26
Cash
All the cash held by an enterprise. Can include: - Petty cash (on the premise) - Cash deposited in bank accounts - Cash equivalents such as short-term investments
27
Equity and liabilities
All the different forms of capital obtained by the enterprise.
28
3 Different types of capital obtained
- Shareholders' equity - Noncurrent liabilities - Current liabilities
29
Equity
All capital provided by the shareholders of the enterprise.
30
Ordinary share capital
The proceeds from the sale of ordinary shares to the shareholders of the enterprise. Calculated by multiplying the issued number of ordinary shares with the average issue price of shares.
31
Non-distributable reserves
Reserves that cannot be paid out to ordinary shareholders as dividends. Include: revaluation reserves and capital redemption reserves.
32
Distributable reserves
Reserves that are distributable to the ordinary shareholders as dividends. Include: retained earnings
33
Ordinary shareholders' equity
The ordinary shareholders' shareholding in the enterprise. Include: ordinary share capital, non-distributable reserves, distributable reserves.
34
Preference share capital
Capital obtained by selling preference shares to investors.
35
Preference shares
Provide the shareholder with a preference right above the ordinary shareholders in terms of dividend payments. Guarantees the shareholder that these dividends will be paid before an ordinary dividend is considered. It may entitle the shareholder to a fixed dividend proceed.
36
Shareholders' equity
The total capital contributed by the shareholders (ordinary and preference). Mostly long-term capital.
37
Non-current liabilities
All long-term debt capital. Ex: long-term loans, mortgage loans, debentures, etc.
38
Current liabilities
Short-term debt capital.
39
Trade payables
Items purchased on credit, where payment only takes place after a period of time. Represents the future obligation that still need to be addressed by the enterprise.
40
Short-term loans
Loans which are expected to be redeemed within the next financial year.
41
Dividends payable
A declared dividend, where payment has not yet taken place by the end of the financial year.
42
Taxation payable
The tax liability that has been determined, but whose payment is still outstanding.
43
Prerequisites for financial statements
- Relevant, with the necessary information. - Understandable to the users. - Reliable and complete info - Objective representation - Timely - Comparable
44
Requirements of ratios:
- Comparison must be meaningful - Ratio value must be a true indication of financial performance (only relevant amounts) - Ratio value must be comparable over a time period
45
Profitability
Indicator of the effectiveness of an enterprise in utilising its capital to generate income.
46
Return on total assets
[![]()](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BOperating%5C&space;profit%5C&space;+%5C&space;Investment%5C&space;income%7D%7BAverage%5C&space;total%5C&space;assets%7D)
47
Return on shareholders' equity
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BOperating%5C&space;profit%5C&space;+%5C&space;Investment%5C&space;income%5C&space;-%5C&space;Finance%5C&space;costs%7D%7BAverage%5C&space;shareholders'%5C&space;equity%7D "\frac{Operating\ profit\ +\ Investment\ income\ -\ Finance\ costs}{Average\ shareholders'\ equity}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BOperating%5C&space;profit%5C&space;+%5C&space;Investment%5C&space;income%5C&space;-%5C&space;Finance%5C&space;costs%7D%7BAverage%5C&space;shareholders'%5C&space;equity%7D)
48
Return on debt capital
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BFinance%5C&space;costs%7D%7BAverage%5C&space;debt%5C&space;capital%7D&space;%5Ctimes&space;100 "\frac{Finance\ costs}{Average\ debt\ capital} \times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BFinance%5C&space;costs%7D%7BAverage%5C&space;debt%5C&space;capital%7D&space;%5Ctimes&space;100)
49
Return on investments
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BInvestment%5C&space;income%7D%7BAverage%5C&space;total%5C&space;investment%7D&space;%5Ctimes&space;100 "\frac{Investment\ income}{Average\ total\ investment} \times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BInvestment%5C&space;income%7D%7BAverage%5C&space;total%5C&space;investment%7D&space;%5Ctimes&space;100)
50
Gross Profit margin
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BGross%5C&space;profit%7D%7BTurnover%7D&space;%5Ctimes&space;100 "\frac{Gross\ profit}{Turnover} \times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BGross%5C&space;profit%7D%7BTurnover%7D&space;%5Ctimes&space;100)
51
Profit margin
Provide an indication of the percentage of turnover that is eventually realised as a profit.
52
Operating profit margin
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BOperating%5C&space;profit%7D%7BTurnover%7D&space;%5Ctimes&space;100 "\frac{Operating\ profit}{Turnover} \times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BOperating%5C&space;profit%7D%7BTurnover%7D&space;%5Ctimes&space;100)
53
EBIT-margin
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BProfit%5C&space;before%5C&space;tax&space;%5C&space;+&space;finance%5C&space;costs%7D%7BTurnover%7D&space;%5Ctimes&space;100 "\frac{Profit\ before\ tax \ + finance\ costs}{Turnover} \times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BProfit%5C&space;before%5C&space;tax&space;%5C&space;+&space;finance%5C&space;costs%7D%7BTurnover%7D&space;%5Ctimes&space;100)
54
Net profit margin
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BProfit%5C&space;after%5C&space;tax%7D%7BTurnover%7D&space;%5Ctimes&space;100 "\frac{Profit\ after\ tax}{Turnover} \times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BProfit%5C&space;after%5C&space;tax%7D%7BTurnover%7D&space;%5Ctimes&space;100)
55
Liquidity
An enterprise's ability to meet its short-term liabilities.
56
Current ratio
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BCurrent%5C&space;assets%7D%7BCurrent%5C&space;liabilities%7D "\frac{Current\ assets}{Current\ liabilities}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BCurrent%5C&space;assets%7D%7BCurrent%5C&space;liabilities%7D)
57
Acid test ratio
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BCurrent%5C&space;assets%5C&space;-%5C&space;Inventory%5C&space;-%5C&space;Prepayments%7D%7BCurrent%5C&space;liabilities%7D "\frac{Current\ assets\ -\ Inventory\ -\ Prepayments}{Current\ liabilities}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BCurrent%5C&space;assets%5C&space;-%5C&space;Inventory%5C&space;-%5C&space;Prepayments%7D%7BCurrent%5C&space;liabilities%7D)
58
Turnover ratios
Provide an indication of the speed with which an investment in assets is transformed into turnover.
59
Turnover ratio of current assets
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BNet%5C&space;turnover%7D%7BAverage%5C&space;current%5C&space;assets%7D "\frac{Net\ turnover}{Average\ current\ assets}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BNet%5C&space;turnover%7D%7BAverage%5C&space;current%5C&space;assets%7D)
60
Time of current assets
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BAverage%5C&space;current%5C&space;assets%7D%7BNet%5C&space;turnover%7D&space;%5Ctimes&space;360 "\frac{Average\ current\ assets}{Net\ turnover} \times 360")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BAverage%5C&space;current%5C&space;assets%7D%7BNet%5C&space;turnover%7D&space;%5Ctimes&space;360)
61
PPE turnover ratio
An indication of the efficiency with which a company's PPE is utilised to generate turnover.
62
Turnover ratio (PPE)
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BNet%5C&space;turnover%7D%7BAverage%5C&space;PPE%5C&space;@%5C&space;carrying%5C&space;value%7D "\frac{Net\ turnover}{Average\ PPE\ @\ carrying\ value}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BNet%5C&space;turnover%7D%7BAverage%5C&space;PPE%5C&space;@%5C&space;carrying%5C&space;value%7D)
63
PPE Turnover time
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BAverage%5C&space;PPE%5C&space;@%5C&space;carrying%5C&space;value%7D%7BNet%5C&space;turnover%7D&space;%5Ctimes&space;360 "\frac{Average\ PPE\ @\ carrying\ value}{Net\ turnover} \times 360")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BAverage%5C&space;PPE%5C&space;@%5C&space;carrying%5C&space;value%7D%7BNet%5C&space;turnover%7D&space;%5Ctimes&space;360)
64
Turnover ratio of trade receivables
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BCredit%5C&space;turnover%7D%7BAverage%5C&space;trade%5C&space;receivables%7D "\frac{Credit\ turnover}{Average\ trade\ receivables}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BCredit%5C&space;turnover%7D%7BAverage%5C&space;trade%5C&space;receivables%7D)
65
Turnover time of trade receivables
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BAverage%5C&space;trade%5C&space;receivables%7D%7BCredit%5C&space;turnover%7D%5Ctimes&space;360 "\frac{Average\ trade\ receivables}{Credit\ turnover}\times 360")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BAverage%5C&space;trade%5C&space;receivables%7D%7BCredit%5C&space;turnover%7D%5Ctimes&space;360)
66
Turnover ratio of inventory
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BCost%5C&space;of%5C&space;sales%7D%7BAverage%5C&space;inventory%7D "\frac{Cost\ of\ sales}{Average\ inventory}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BCost%5C&space;of%5C&space;sales%7D%7BAverage%5C&space;inventory%7D)
67
Turnover time of inventory
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BAverage%5C&space;inventory%7D%7BCost%5C&space;of%5C&space;sales%7D%5Ctimes&space;360 "\frac{Average\ inventory}{Cost\ of\ sales}\times 360")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BAverage%5C&space;inventory%7D%7BCost%5C&space;of%5C&space;sales%7D%5Ctimes&space;360)
68
Debt-to-assets ratio
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BDebt%5C&space;capital%7D%7BTotal%5C&space;assets%7D%5Ctimes&space;100 "\frac{Debt\ capital}{Total\ assets}\times 100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BDebt%5C&space;capital%7D%7BTotal%5C&space;assets%7D%5Ctimes&space;100)
69
Solvency
The enterprise's ability to meet all its obligations upon the eventual ending of its operations.
70
Finance cost coverage
Indicator of if sufficient profits are available to pay the finance cost.
71
Finance cost coverage
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BProfit%5C&space;before%5C&space;finance%5C&space;cost%5C&space;and%5C&space;tax%7D%7BFinance%5C&space;costs%7D "\frac{Profit\ before\ finance\ cost\ and\ tax}{Finance\ costs}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BProfit%5C&space;before%5C&space;finance%5C&space;cost%5C&space;and%5C&space;tax%7D%7BFinance%5C&space;costs%7D)
72
Ordinary dividend coverage
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BEarnings%5C&space;per%5C&space;share%7D%7BDividend%5C&space;per%5C&space;share%7D "\frac{Earnings\ per\ share}{Dividend\ per\ share}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BEarnings%5C&space;per%5C&space;share%7D%7BDividend%5C&space;per%5C&space;share%7D)
73
Dividend cover
Calculated to determine if the enterprise has sufficient profits available to pay the ordinary dividends.
74
Earnings per share
Indication of the attributable earnings earned per share during the year. [![](http://latex.codecogs.com/png.latex?%5Cfrac%7BAttributable%5C&space;earnings%7D%7BAverage%5C&space;number%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D "\frac{Attributable\ earnings}{Average\ number\ of\ ordinary\ shares\ issued}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BAttributable%5C&space;earnings%7D%7BAverage%5C&space;number%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D)
75
Earnings yield
An indication of the earnings earned by the shareholders on the market price of the share. [![](http://latex.codecogs.com/png.latex?%5Cfrac%7BEarnings%5C&space;per%5C&space;share%7D%7BAverage%5C&space;number%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D "\frac{Earnings\ per\ share}{Market\ price\ per\ share}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BEarnings%5C&space;per%5C&space;share%7D%7BAverage%5C&space;number%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D)
76
Dividend per share
Indicates what amount per share was received in the form of dividends [![](http://latex.codecogs.com/png.latex?%5Cfrac%7BOrdinary%5C&space;dividends%5C&space;declared%7D%7BAverage%5C&space;number%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D "\frac{Ordinary\ dividends\ declared}{Average\ number\ of\ ordinary\ shares\ issued}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BOrdinary%5C&space;dividends%5C&space;declared%7D%7BAverage%5C&space;number%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D)
77
Dividend yield
[![](http://latex.codecogs.com/png.latex?%5Cfrac%7BDividend%5C&space;per%5C&space;share%7D%7BMarket%5C&space;price%5C&space;per%5C&space;share%7D%5Ctimes100 "\frac{Dividend\ per\ share}{Market\ price\ per\ share}\times100")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BDividend%5C&space;per%5C&space;share%7D%7BMarket%5C&space;price%5C&space;per%5C&space;share%7D%5Ctimes100)
78
Price-earnings ratio
Indicates how much an investor is willing to pay for each R1 earnings per share that is earned by the enterprise. [![](http://latex.codecogs.com/png.latex?%5Cfrac%7BMarket%5C&space;price%5C&space;per%5C&space;share%7D%7BEarnings%5C&space;per%5C&space;share%7D "\frac{Market\ price\ per\ share}{Earnings\ per\ share}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BMarket%5C&space;price%5C&space;per%5C&space;share%7D%7BEarnings%5C&space;per%5C&space;share%7D)
79
Book value per share
Calculates what statement of financial position value each share should have if all debt capital is repaid. [![](http://latex.codecogs.com/png.latex?%5Cfrac%7BShareholders'%5C&space;equity%5C&space;-%5C&space;preference%5C&space;shares%5C&space;-%5C&space;immaterial%5C&space;assets%7D%7BNumber%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D "\frac{Shareholders'\ equity\ -\ preference\ shares\ -\ immaterial\ assets}{Number\ of\ ordinary\ shares\ issued}")](http://www.codecogs.com/eqnedit.php?latex=%5Cfrac%7BShareholders'%5C&space;equity%5C&space;-%5C&space;preference%5C&space;shares%5C&space;-%5C&space;immaterial%5C&space;assets%7D%7BNumber%5C&space;of%5C&space;ordinary%5C&space;shares%5C&space;issued%7D)

Business Management 142 (10 decks)

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