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25 Cards in this Set
- Front
- Back
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Who are the primary users of annual reports? |
-equity investors -credit grantors -management |
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Why do equity investors use annual reports to analyse financial ratios? |
-they need to know the return on capital invested -the need info on capital preservation and growth |
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Why do credit grantors use annual reports? |
Short term- interest cover, repayment of amounts owing Long term - interest cover and capital preservation |
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Why do management use annual reports? |
-decision making -planning and control |
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Name the secondary users of annual reports: |
-employees: job security; wage and salary negotiations -acquisition and merger analysts: valuation of potential candidates -auditors: analytical review -other/ SARS - tax authorities : income fairly stated |
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What is the procedure to follow when analysing financial ratios? |
1. Know the formula 2. Calculate financial ratio 3. Correct expression of financial ratio 4. Define financial ratio - what info is being conveyed 5. Compare calculated financial ratio to given benchmark in question: -increases can be good or bad -decreases can be good or bad -identify reasons why financial ratio decreased or increased and the future financial implications 6. Make recommendations to improve the situation |
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What should deferred tax be treated as when calculating financial ratios? |
Treat as a non-current asset, because it is an interest free liability |
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What does the total asset turnover ratio evaluate? |
It evaluates the use of all assets to generate Revenue (income) |
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What do debt ratios examine? What do they determine? What do they indicate? |
- debt ratios examine financial structure of business -determine whether business made efficient use of Debt to create wealth. -indicates the percentage of total assets financed by total debt |
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What does the gross margin on sale ratio calculate? |
Calculates the amount that is left from every R1 of sales earned after deducting the cost of sales expense. |
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What does the amount of gross margin on sales ratio represent? |
This is the amount available to pay operating expenses and profit -for every R1 of revenue, the firm earned x% of Gross profit |
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What can a decrease in gross profit margin be caused by? |
-lowered prices -increase in cost of sales or combination of the two -incorrect mix of inventory -policies of inventory valuation |
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What does return on equity measure? |
Overall measures the financial success of the firm with respect to increasing shareholder’s wealth |
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What ratio do you use as the primary measure of a company’s performance? |
The headline earnings per share ratio |
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What does headline earnings per share ratio measure? |
Measures profitability from the view of the ordinary shareholders |
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What does the dividend cover ratio indicate? |
It indicates the number of times the dividends can be paid out of current earnings. |
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What does a high dividend cover mean? |
Means a large percentage of earnings are retained within the firm to finance future growth plans |
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What does a dividend cover of less than 1 mean? |
- current years earnings are not enough to pay current year dividends |
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What does the pay out ratio calculate? |
It calculates what percentage of earnings is paid out as dividends to shareholders |
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What is the importance to retain portion of profits? |
To maintain or expand operations |
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What does retention ratio calculate? |
It calculates the amount of profits that are retained in the business to finance future growth plans. |
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How does one calculate Return on Equity using the Du Pont Analysis? |
Net margin * total asset turnover * equity multiplier |
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What does net margin evaluate? |
Evaluates operational efficiency in terms of sales, cost of sales expense and operating expenses |
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What does total asset turnover evaluate ? |
Evaluates efficienct use of assets |
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What is the equity multiplier used for? |
-use of debt to lever up returns to shareholders/ exposure to financial risk |
