Module 6: Analysis of Financial Statements Flashcards by Oliver Casey

Financial analysis can be broken down into:
1) C_________ c______ a______
2) T_____ a_______
3) R_____ a_______

Comparable company analysis;
Trend analysis;
Ratio analysis;

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Basic ratios can be grouped into four categories:
- P__________
- S_______
- L_______/e_______
- I________

Profitability;
Solvency;
Liquidity/efficiency;
Investor;

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Other items that should be looked at to complement ratio analysis:
- The content of any a_________ c_________ on the financial statements and other statements;
- The a___ and n______ of the company’s a_____
- C______ and f______ developments in the company’s m_____, at home and overseas;
- U______ items separately disclosed in the SPLOCI; and
- Any other n_________ f______ of the report and financial statements, such as events after the end of the reporting period.

accompanying commentary;
age; nature; assets;
Current; future; markets;
Unusual;
noticeable features;

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Return on investment (ROI), and
Return on Equity (ROE)
are used by s_________ or the B_____ to assess the p__________ of an entity and the p________ of its m__________.

shareholders; Board;
profitability; performance; management;

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P_____ b_____ t_______ is generally thought to be a better figure to use than p_____ a_____ t________, because there may be unusual variations in the t__ c_____ from year to year.

Profit before taxation;
profit after taxation;
tax charge;

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Earnings before interest and tax (EBIT) is:
P____ after t__
+ I______;
+ T__

Profit; tax;
Interest;
Tax;

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Gross Profit Margin

( Gross Profit / Sales ) * 100%

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Operating Profit Margin

= ( EBIT / Sales ) * 100%

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Net Profit Margin

( Profit after tax (profit for the year) / Sales ) * 100%

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It is impossible to assess p_____ or p_____ g_____ properly without relating them to the amount that has been i_______ in the company in order to earn the p_____.

profits; profit growth; invested; profits;

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Investment (capital employed) = S________ e_____ + N__ - c_______ l________ (or t____ a_____ - c_______ l________)

Shareholder’s equity;
Non-current liabilities;
Total assets - Current liabilities;

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ROI

(Earnings before interest and taxation) / (Total assets - Current liabilities) * 100%

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Three comparisons that can be made with ROI:
1) The c_____ in ROI from one y___ to the next
2) The ROI being earned by o____ c________
3) A comparison of the ROI with c______ m_____ b_________ r____

change; year;
other companies;
current market borrowing rates;

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Return on Equity (ROE) looks at p_____ from the perspective of e_____ i________

profit; equity investors;

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ROE

(Profit after tax and preference dividend) / Shareholder’s equity * 100%

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ROE can be broken down into three separate components:
1) E_____ s_________ p_____ m_____
*
2) A_____ t________
*
3) A____ to e______ r_____

Equity shareholder profit margin;
Asset turnover;
Asset; equity ratio;

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1) Equity shareholder profit margin (formula)

Profit after tax and preference dividend / Revenue

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2) Asset turnover (formula)

Revenue / (Total Assets - Current Liabilities)

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3) Assets to equity (formula)

(Total assets - Current liabilities) / Shareholder’s equity

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Operating profit margin

EBIT / Sales

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ROI = O_______ p____ m____ x A____ t________

Now write this as a broken-down formula

EBIT / (TA - CL) = EBIT / Revenue * Revenue / (TA - CL)

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A High profit margin means:

A high profit per $1 of s____
It also means that s____ p____ are high, there is a strong possibility that s_____ r______ will be depressed, because
The h___ p____ is likely to reduce d_____ for the produce, and so
A____ t______ is l_____

sales;
sales prices;
sales revenue;
high price;
demand;
Asset turnover; lower;

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A high asset turnover means that:

The company is generating a lot of s____, but to do this:
It might have to keep its prices d___ and so accept a:
L__ p____ m_____ per $1 of s____

Sales;
down;
Low profit margin; sales;

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Return on Assets (ROA) specifically examines the p________ of n__ - c______ a_____ in generating s____

productivity; non-current assets; sales;

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Return on Assets (ROA)

EBIT / Average total assets *average total assets is the: (Total assets of Yr 1 + Total assets of Yr 2) / 2

ROA can also be calculated as: O_______ p_____ m______ * A_____ t________

Operating profit margin; Asset turnover;

Debt ratios are concerned with how much the c_______ o___ in relation to its s___.

company owes; size;

Gearing or leverage is concerned with the company's l___ - t___ c______ s_______ Gearing represents the proportion of the company's f_______ on which a return must be paid regardless of p__________

long-term capital structure; financing; profitability;

Working capital

Current assets - Current liabilities

- Redeemable preference share capital is normally classified as a n__ - c_____ l______

non-current liability;

Preference dividends (paid or accrued) are included in f______ c____ in the SPLOCI.

finance costs;

The capital gearing ratio is a measure of the proportion of a c_______'s c______ that is d___. What is the formula?

Company's capital; debt; Interest bearing debt / (Shareholder's equity + Interest bearing debt)

A company is highly geared if: - Gearing ratio > ? % A company is lowly geared if: - Gearing ratio < ? %

50%; 50%;

Gearing can also be calculated as: - A_____ to e______ r_____ - D___ to t_____ a______ r______

Assets; equity ratio; Debt; total assets ratio;

Assets to equity ratio

(Non-current assets + Net current assets) / Shareholder's equity

Debt to total assets ratio

Interest bearing debt / Total assets

The assets to equity ratio measures g______ from the viewpoint of the e_____ i_______

gearing; equity investors;

Debt to total assets may also be calculated as:

Total liabilities / Total assets

Equity to assets ratio = 1) S________ e____ / (N__ - c______ a____ + N__ c______ a_____ ) 2) S________ e____ / (T____ a_____ - c_______ l________ )

Shareholder's equity; Non-current assets + Net current assets; Shareholder's equity; Total assets - current liabilities;

Gearing or leverage is an attempt to q_____ the d_____ of r____ involved in holding s____ c______ in a c______.

quantify; degree; risk; share capital; company;

The more highly geared a company, the greater the r___ that l_____ (if any) p____ / f____ will be available to distribute by way of d_______ to the o_______ s________.

risk; little; profit/funds; dividends; ordinary shareholders;

- A highly geared company has a large amount of i______ to pay annually. - If those borrowings are 's______' in any way, then the holders of the d___ are entitled to f____ the c______ to sell s______ a____ to pay o______ i______.

interest; secured; debt; force; company; secured assets; overdue interest;

Interest cover

EBIT / Interest charges

- An interest cover of 2x or less is considered ___. - Should probably exceed 3x before the company's i______ c____ are considered within a________ limits.

low; interest costs; acceptable;

The current and quick ratios reveal a company's ability to: - P__ its d____ as they fall d__ (its l______ ) Efficient management of w______ c______ revealed by e_______ ratios will contribute to a healthy l_______ p_______

Pay; debts; due; liquidity; working capital; efficiency; liquidity position;

Liquid assets are: - C___ - S____-t___ f________ investments for which there is a r_____ m_____; - T____ r_______ - I________ - B____ of e________ r_________

Cash; Short-term financial; ready market; Trade receivables; Inventories; Bills; exchange receivable;

In summary, liquid assets are c______ a_____ items that will or could soon be converted into c___, and c___ itself.

current asset; cash; cash;

The cash cycle describes the f___ of c____ out of a b_______ and back into it again as a result of n_____ t______ o_________.

flow; cash; business; normal trading operations;

Current ratio

Current assets / Current liabilities

- Holding i_________ and having r__________ are two reasons why c____ r_______ are d_______

inventories; receivables; cash receipts; delayed;

- Taking credit from s_______ can be seen as another reason why c___ p_______ are d_______

suppliers; cash payments; delayed;

Quick ratio (acid test ratio)

(Current assets - Inventory) / Current liabilities

Estimated average accounts receivable collection period (Receivables' days)

= (Trade receivables / Sales ) * 365 days

Inventory turnover period

(Inventory / Cost of sales) * 365 days

Inventory turnover

Cost of sales / Inventory

Generally: - The h_____ the i_______ t______ the better, ie: - The l_____ the i_______ t_______ p_____ the better

higher; inventory turnover; lower; inventory turnover period;

A lengthening inventory turnover period (or reducing inventory turnover) from one year to the next may indicate: - A s________ in t______; or - A build-up in i_______ levels, perhaps suggesting that the i_________ in i________ is becoming e________

slowdown; trading; inventory; investment; inventory; excessive;

Accounts payable payment period

(Trade accounts payable / Purchases) * 365 days

Q2 P397 Study Guide;

See textbook;

Q3 Cash Cycle P397 Study Guide

See textbook;

Cash cycle

Inventory days + Receivables days - Payables days

Investor ratios help e____ s________ and other investors assess the v____ and q_____ of an i_________ in the o______ s_____ of a company.

equity shareholders; value; quality; investment; ordinary shares;

Investor ratios include: - E______ p__ s_____ - D_______ c_____ - P_____ / E_______ (_/_) - D_______ y____

Earnings per share; Dividend cover; Price/Earnings (P/E); Dividend yield;

Earnings per share

Profit attributable to ordinary shareholders / Number of ordinary shares on issue

Dividend cover

Earnings per share / Dividend per (ordinary) share

Dividend cover shows the p_____ for the y___ that is available for d_________ to s_________ that has been p___ (or proposed) and the p_______ r_______ in the business to finance f______ g______.

profit; year; distribution; shareholders; paid; proportion retained; future growth;

Price/Earnings (P/E)

Current share price / EPS

A high P/E ratio indicates strong s_______ c_______ in the company and its f______

shareholder confidence; future;

Dividend yield

Dividend per share for the year / Current market value of the share (ex-div)

Q4 Dividend Yield P399

See textbook;

Shareholders look for both d_______ y_____ and c______ g_____

dividend yield; capital growth;

Q5 Ratios P399

See textbook;

Limitations of financial analysis: - Problems of h_______ c___ information - C______ a________ - The effect of r______ p_____ - S_______ t______ - A____ a_________

historical cost; Creative accounting; related parties; Seasonal trends; Asset acquisitions;

Revaluing land and buildings upwards: - Decreases _ _ _ , because it - Increases n__ a______ and r______ p______

ROI; net assets; reduces profits;

Q2 P406 Study Guide

See textbook;

Q4 P406 Study Guide;

See textbook;

Q6 P407 Study Guide

See textbook;

Q8 P407 Study Guide;

See textbook;

Q11 P408 Study Guide

See textbook;

Q14 P409 Study Guide

See textbook;

When property is revalued and property values have fallen: - Capital employed (assets) will _________, thus __________ ROI - If an impairment loss exists, this will ________ equity (revaluation surplus), and hence ________ gearing

decrease; increasing; decrease; increase;

Which of the following is a possible reason why a company's inventory holding period increases from one year to the next? A) Increase in demand for products B) A reduction in selling prices C) Obsolete inventory lines D) Seasonal fluctuations in orders

C) Obsolete inventory lines

The following will not reduce the level of a company's gearing: Renegotiating a ____ to secure a l_____ i_______ rate

loan; lower interest;

Revaluations d_______ profits and i_______ capital employed and will therefore d_______ r______ on c______ e________

decrease; increase; decrease return; capital employed;

A year-end investment in plant and machinery financed through additional capital will i_______ the c_____ e_______ without increasing p_____ in the current year, therefore r_______ ROI.

increase; capital employed; profits; reducing;

When loan notes are issued to replace shares and vice versa, there is no impact on o_______ p_____ or t_____ c______ e________ and will therefore have no effect on ROI.

operating profit; total capital employed;

Module 6: Analysis of Financial Statements Flashcards

(86 cards)