Flashcards in 11) Financial ratios Deck (33)

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1

## what are the four categories of ratios

###
Profitability and return

Debt and gearing

Liquidity

Investor ratios

2

##
What do and are the profitability and return ratios tell you?

and name the categories they fall under

###
Profitability and return ratios are probably the most widely used. They are key to any financial manager wanting to assess performance against objectives as well as being crucial to the investment decision.

An external investor will also monitor these ratios closely when deciding whether to provide the company with finance and to assess the value of the overall business.

ROCE

Profit margins

Asset turnover

3

##
What is return on capital employed? ROCE

and main disadvantage

###
Return to all providers of capital

ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per $1 invested.

Operating profit

÷

Capital employed (Equity & Non Current liabilities)

Operating profit= Profit BEFORE interest and tax

CE= Total Assets - Current liabilities (leaves N/C Liabilities and Equity)

CE= Share capital + Reserves + Long term loans

Disadvantage: uses profit, which is not directly linked to the objective of maximizing shareholder wealth.

4

## ROCE can be broken down into? %

###
Asset turnover

Net profit margin

5

## What is asset turnover (Times) and the general formula

###
The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets.

Sales Rev

÷

Capital employed (Equity and Non Current liabilities)

6

## What are the two types of asset turnover

###
working capital

Non current asset turnover

7

## what is working capital asset turnover formula

###
Working capital turnover is a ratio that measures how efficiently a company is using its working capital to support a given level of sales. shows the relationship between the funds used to finance a company's operations and the revenues a company generates as a result

Sales rev

÷

Net working capital

8

## what is non current asset turnover formula

###
Used to measure operating performance. This efficiency ratio compares net sales and measures a company's ability to generate net sales from its fixed-asset investments (E.g. PP&E)

Sales rev

÷

N/C Assets

9

##
What is Net profit margin and formula %

what is the definition of net profit

###
The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit. i.e. how much % of the total revenue is actually profit

A comparison of the changes in the two ratios can often reveal more information about cost control and the changes in operating gearing. Operating profit can also be expressed as profit before interest and taxation (PBIT).

Net profit

÷

Sales rev

Net profit = Revenue - CoS - Operating expenses - Interest- Taxes

10

## What are the two profit margin formula

###
A comparison of the changes in the two ratios can often reveal more information about cost control and the changes in operating gearing. Operating profit can also be expressed as profit before interest and taxation (PBIT).

Gross profit margin

Operating ratio

11

## what is Gross profit margin

###
gross profit margin shows the amount of profit after cost of sales/goods sold

Gross profit

÷

Sales rev

12

## what is Operating ratio

###
measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax.

Expenses

÷

Sales rev

13

## What is return on equity? ROE

### ROE measures how much profit a company generates for its ordinary shareholders with the money they have invested in the company.

14

## What is return on equity? ROE Formula

###
Profit after tax and preference dividend

÷

Equity

Equity= ordinary share capital + Reserves

15

## what are the disadvantages of ROE

###
Disadvantages of ROE:

it uses profits, which are an unreliable measure and not directly linked to shareholder wealth

it is sensitive to gearing levels – ROE will increase as gearing ratio increases.

16

## What are the debt and gearing ratios looking at?

### Ratios that look at debt and gearing are a crucial way of assessing the risk profile of the business. They will therefore be used extensively by financial managers when taking financing decisions as well as by current and potential investors when assessing the amount of financing to offer and the level of return to demand.

17

## what are the list of debt and gearing ratios?

###
Interest cover

Gearing

18

## what is interest cover formula

###
Looks at the POV of P/L- How many times do we cover the interest that is payable in the P/L

Operating profit

÷

Interest payable

OP=Operating profits before debt interest and tax

19

## What is the gearing ratio

###
Non current liabiliites

÷

Equity & Non current liabiliites

20

## What is earnings per share

###
This is the basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit, in cents, attributable to each ordinary share.

Earnings available to ordinary shareholders

÷

No of ordinary shares in issue

Earnings available to OS= profit after interest and tax- Preference dividend

21

## what are the disadvantages of EPS

###
EPS does not represent the income of the shareholder. Rather, it represents the investor’s share of profit after tax generated by the company according to an accounting formula.

When calculating the EPS, you cannot compare EPS of one company with EPS of another, as the answer would be meaningless. You should first calculate the growth rate of the EPS and then compare it with the growth of similar companies.

Although the ratio is simple in principle, in practice, there may be a number of complications as both the definitions of earnings and shares in issue require careful analysis. Accounting treatment may cause the ratios to be distorted, if for example the earnings figure includes the effects of extraordinary items.

22

## What is PE ratio?

###
This is the basic measure of a company’s performance from the market’s point of view. Investors estimate a share’s value as the amount they are willing to pay for each unit of earnings. It expresses the current share price as a multiple of the most recent EPS/Current earnings.

If a PE ratio is high, investors expect profits to rise. This does not necessarily mean that all companies on high PE ratios are expected to perform to a high standard, merely that they are expected to do significantly better than in the past. They may have greater growth potential because they are coming from a low base.

23

## what is PE formula

###
Share Price

÷

EPS

24

## What is dividend per share (DPS)? %

###
The DPS helps individual (ordinary) shareholders see how much of the overall dividend pay-out they are entitled to in %

Since the shareholders are the owners of the business, they are entitled to their share of the profits. This is most simply achieved by paying the amount out as a dividend. It is usually expressed as an amount per share. This is because the total amount a shareholder gets has to reflect their share of the company.

25

## What is dividend per share (DPS) formula %

###
Total ordinary dividend

÷

Total number of shares issued

26

## what is dividend cover?

### It is a measure of how many times the company’s earnings could pay the dividend. The higher the cover, the better the ability to maintain dividends if profits drop

27

##
what is dividend cover formula

and give the alternative formula

###
Profit available for ordinary shares

÷

Dividend for the year (interim plus)

OR

EPS

÷

DPS

28

## What is dividend yield and formula

###
The dividend yield, expressed as a percentage, is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

This provides a direct measure of the wealth received by the (ordinary) shareholder. It is the annual dividend per share expressed as an annual rate of return on the share price.

It means that if you buy a shares, the dividend ÷ by the amount you pay for the share is 5% return. You're getting a 5% return in the form of a dividend when you buy that share

DPS

÷

Share price

29

## what are the disadvantages of dividend yield?

### it fails to take account of any anticipated capital growth so does not represent the total return to the investor.

30