Week 2 Flashcards
(32 cards)
Who is the annual report read by?
Investors, lenders, advisors, suppliers, government and competitors
Balance sheet equation
Assets = liabilities + equity
Liabilities
money legally owned to suppliers
Equity
Shareholders own/funds, share capital/premium, any profit kept back or retained earnings
SOFP
CA + NC = CL + NCL + E
Net working capital equation
CA - CL
Why is positive net working capital preferred?
It means enough cash will be available to pay off liabilities arising
Book value
Accounting figures drawn from Accounting Standards
Market value
Value based on prices or market valuations
Market value equation
Market price x number of shares
Net income (profit for the year)
Revenues - expenses
Income statement
Measures performance over a specific period
Three important considerations
Non cash items
Time
Cost
Total cash flow
Cash flow from operating activities + investing activities + financing activities
Ratio analysis
Simplify data into key indicators to highlight trends and variances in profitability, financial strength and ability, cash flow generation
Trend analysis
Same company, different time periods
Peer analysis
Several companies e.g. in same sector
Ratio analysis: short term solvency equation
Working capital management / cash position
Short term solvency: higher liquid ration (>1)…
The more solvent the company is in short term
The less risk of financial distress in short term
Short term solvency ratios
Current, quick and cash ratio
Ratio analysis: financial leverage
Long term solvency
Assets v liability
Assets v equity
Liability v equity
Financial leverage: lower the debt-equity ratio or equity multiplier / or higher interest cover ratios
The more solvent the company is in long term
The lower risk of financial distress in the long term
Ratio analysis: asset turnover
Efficient use of assets, investments
Asset turnover ratios
Inventory turnover Days' sales in inventory Receivables turnover Days' sales in receivables Total asset turnover
