financial analysis W4L1

Question 1

Why is cash flow crucial for a business?

Answer 1

• Indicates the actual money a business possesses
• shows how income statement/balance sheet figures translate into bank funds.
• Removes accounting complexities to reveal a company’s true financial status.

Question 2

What term is associated with accounting simplifications involving accrued amounts on the Balance Sheet?

Answer 2

simplicationhas to do with accured accounting.it tells you when revenue has been earned and expemses when incurred

Question 3

cash conversion formula

Answer 3

cash generated from operations/operating profit

Question 4

How should one interpret Cash Conversion?

Answer 4

The higher the Cash Conversion, the better. Low conversion rates might signal accounting issues.

Question 5

What analytical issues can affect the understanding of Cash Conversion?

Answer 5

• Fluctuations in cash spending on investment can distort the interpretation of Cash Conversion.
• Some analysts calculate variations of this ratio by comparing different levels of Cash Flow and Income Statements.

Question 6

What does Capital Expenditure refer to in accounting?

Answer 6

Capital Expenditure in accounting is money spent on things that will help a business for a long time, like buying equipment or property that the company will use to make products or provide services..

Question 7

What components make up Capital Expenditure (aka Capex)?

Answer 7

property, plant, equipment

Question 8

Why is Capex important for companies in terms of reinvestment?

Answer 8

Companies decide the amount of retained profits to reinvest through Capital Investment, which Capex contributes to significantly.

Question 9

How is Capex related to retained profits and compound growth?

Answer 9

Higher Capex implies a greater proportion of retained profits being reinvested back into the company, aiding in compound growth over time.

Question 10

formula for capex to revenue

Answer 10

capital expenditure/revenue

Question 11

What purpose do specialised cash flow have in financial analysis?

Answer 11

help them check how well a company is doing and where it stands financially

Question 12

EBITDA

Answer 12

Earnings Before Interest, Tax
Depreciation and Amortisation

Question 13

FCF

Answer 13

Free Cash Flow

Question 14

what does EBITDA provide?

Answer 14

an accessible and easy-to-calculate measure of cash flow

Question 15

What are the disadvantages associated with EBITDA?

Answer 15

• ## ignores the cost of investment by stripping out depreciation and doesn’t consider Capex

Question 16

formula for EBITDA

Answer 16

Operating profit+Depreciation and Amortisation

Question 17

what does free cash flow measure

Answer 17

measures the cash available after expenses and investements

Question 18

What are the advantages of using Free Cash Flow (FCF) compared to EBITDA?

Answer 18

Unlike EBITDA, FCF considers investment costs.

Question 19

Calculating Free Cash Flow

Answer 19

cash generated from operation- captial expenditure - Tax