FRA Flashcards
(44 cards)
purpose of FRA’s
analyse important financial characteristics of an enterprise by comparing the financial ratios for the enterprise against an appropiate benchmark
debt
interest bearing liabilities
D/E - total debt
debt to equity ratio
indicator of financial leverage
for every R1 of capital provided by shareholders __ cents was provided by ALL liabilities
(total debt x 100) / equity
%
eg. 110.87% - R1.11 cents
higher D/E - higher exposure to financial risk
deferred tax
company is running at a loss and can’t pay tax, owes money
should be treated as an interest free liability
OR a non-current asset if company overpaid tax, they owe you
solvency
the ability of a company to meet its long term debts and financial obligations. demonstrates company’s ability to manage its operations in the forseeable future
total assets> total liabilities
NAV
Net asset value
value of an investment fund
Assets less liabilities
NAV per share
net asset value per share
NAV/ no. of shares in issue
how much each share would be worth if company were to liquidate all of its assets and pay of all its liabilities
The higher the better
liquidity ratios
the ability of the firm to convert its current assets into cash to settle its current liabilities
current ratio
reflects liquidity
ability of a firm to settle it short term debts from all its current assets
current assets/ current liabilities
answer is times. for every R1 owed to creditors, company has (ans) at its disposal
ratio greater than 1: company has more assets than liabilities - strong liquidity position. ratio less than 1: company may struggle to meet its short-term obligations,potential liquidity issues.
acid test ratio
reflects liquidity
aka quick ratio
more reliable indicator id liquidity
like current ratio but takes out inventory to give a true reflection.
(Current assets- inventory)/current liabilities
days inventory on hand
indicator of asset management/efficiency
calculates ave. num of days between the purchase and sale of inventory on credit
(inventory x 365)/cost of sales
answer is in days
-increased DIOH indicates inefficient inventory management
-increases risk of inventory obsolesence + carrying costs
-impacts negatively on future profits and cash flows
-high levels of inventory negatively affect ROA and TAT ratios
however holding too much inventory decreases risk of stock-outs resulting in increased sales (profits) and
reduces ordering costs
inventory turnover ratio
indicator of asset management
calculates average no. of times inventory is sold during the year
how fast company is selling inventory
cost of sales/inventory
answer is “__ times a period”
the higher the better-suggests company is effectively managing its inventory and not tying up excess capital in unsold goods.
account receivables days
indicator of asset management
aka collection period
ave. num of days between credit sales and when cash si collected from debtors
(trade receivables x 365)/ credit sales
answer is days
generally the lower the better
decreasing collection period:
Benefit: Cash inflows improve, Bad debts decrease.Risks: Sales may decrease decreasing profits?
increasing collection period:
Benefits: Sales may increase increasing Accrual profits.
Risks: Cash inflows reduce, Bad debts increas
accounts payables days
indicator of asset management
aka creditors payment period
calculates ave. num of days between credit purchases and when cash is paid to creditors (how long company takes to pay its suppliers)
(accounts or trade payables x 365) / cost of sales
answer in days
higher- company delays payments-good source of interest free finance.
can increase it by strecthing payment as long as its within credit terms
asset turnover ratios
how efficiently a company is using its owned resources to generate revenue/sales
total asset turnover
use of all assets to generate revenue/income
revenue or sales/total assets at CV
answer is times
“for every R1 invested in assets, __ was generated as sales income”
decrease- assets used less efficiently
fixed asset turnover
aka non current asset turnover
evaluates use of fixed assets to generate income
revenue or sales/ fixed assets at CV
analsyis same
financial leverage ratios
debt ratios
examine the capital structure of the business and whether business has made efficient use of debt/leverage to create wealth
firm could enjoy interest tax shield benefit by taking more debt (since interest is tax deductible)
but too much debt, costs of bankruptcy will begin to outweigh benefit and company will destroy shareholder value by taking on add. debt
debt ratio
indicator of financial leverage
% of total assets financed by total debt
debt : NCL + CL
(total debt x 100) / total assets
answer is %
decrease in debt:
Good - decreased exposure to Financial Risk in form of Interest and capital
repayments.
Bad – Forego advantage of debt to lever up returns to shareholders &
benefits of interest tax shield to reduce tax expense
D/E I.B.D
indicator of financial leverage
(interest bearing debt x 100) / equity
%
for every R1 of capital provided by shareholders __ cents was provided by interest bearing liabilities
decrease- less finanical risk
times interest earned ratio
indicator of financial leverage
ability of business to pay interest from accrual net profit before interest and tax
EBIT/interest expense
answer is times
higher: indicates business strength and a lower risk of insolvency, inability to pay debt interest, default, or financial distress.
EBIT
earnings before interest and tax
interest is tax deductible
allows you to reduce your taxes by claiming allowable expenses
cash coverage ratio
indicator of financial leverage
ability of business to pay interest from its operating cash flows
more reliable indicator of firms ability to pay interest
(EBIT + depreciation and amortisation)/ interest expense
answer is times
1: business has just enough cash to pay off current liabilities. financial health . <1 : business has means to pay off current debts with funds leftover. 1>: does not have enough cash to pay off current debt. business prompted to increase revenur or reduce overall debt
