week 3 finance

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week 3 interpretation of financial statements and ratio
equity = risk capital
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why is equity risk capital
if you can get it back the company will pay in dividends
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annual report - valuation book vs market
income = rev, sales, turnover, expenses, cashflow. O, I , F
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JIT principle
when you don't need stock you save money in warehousing. - kaizen
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asset turnover
how efficiently is the firm using its assets to generate sales?
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book vs market- why do IAS use both HC and fair value
book value - historical cost can be OBJECITVELY and PRECISELY measured
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market value
fair value can be difficult to estimate and analysts may come up with different figures.
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trade off between
relevance(market values) and objectivity (book values)
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ratios
earnings per share, Price earnings ratio, price earnings growth
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1 2 and 3 measure
the LT success of the company and shareholder value / returns
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eps
net income per share: shareholders and analysts of interest to this
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pe ratio
how much are investors willing to pay per unit of current earnings. high = investor expectation for strong growth.
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p/ e growth
indicated whether shares are over or under valued against its projected earnings growth rates
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book value per share =
total equity / no of shares
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market to book ratio indicates
how successful company has been overtime in creating value
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net income =
dividends + retained earnings
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market to book ratio =
market value per share / book value per share
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tobins q
compares the market value of assets with the cost of setting up a similar company today
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tobins q
the market value of assets. ( market v of debt and equity / replacement cost of assets).
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high robins q
company is in strong competitive position to achieve high MV. but may be a risk that new companies are set up to compete in future due to relatively low replacement costs. + increased comp. = FALL IN SHARE OVER LT
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so market value per share
= share price
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book value per share
= total equity in accounts / number of shares
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use book value of debt as good approximation of
market value of debt
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return on equity: du point identity
popular way of decomposing roe into parts
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operating, asset, financial leverage
pm x tat x em
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you want roe over 1%
du point identity means we have a stronger way of finding missing variables
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why look at accounting info?
because likely to have full market value info: where available use market values
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why evaluate financial statements
internal use: performance evaluation: management compensation, divisional comparison, basis for forecasting
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external uses
creditors, investor, credit rating agencies, suppliers, customers: assess other companies / competitors, acquisition opportunities, financial strength
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objectives under ratio of interest
depends on which angle you are taking
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banks will have different angles to what sh would
bank look at lt solvency, shareholders at roe, dividends per share etc
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time trend analysis
same ratio over a number of years
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peer group analysis.
compares ratios with other firms, companies in same industry ( check sic codes)
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inappropriate peers
some companies operatinge in several industries: different accounting standards
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aspirant analysis
you may want to compare your firm with the best in the industry- you choose similar firms at the top of the industry
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sources of job info
financial websites eg Bloomberg, Reuters, ft.com
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company accounts
download from web. reputable sources needed
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AA: choosing companies that are strong
investor relations: part of company web helps. lots of condenses info: user friendly
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leonadro spa example
financial data- see image. interest cover increased.
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financial analysis
internal uses, external uses ( creditors vs equity investors look at the statement)- decide on whether they want to invest
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companies frequently recognise
it is hard to track divisional performance overtime
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external uses - creditors
" despite projected shortfalll in fcf for 2019due to working capital build up.." "key rating drivers" "cashflows expected to recover: profitability is largely in line with worst investment grade peers"
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summary
ratio analysis- trends and variances, market value, toxins q, du point, interpretation of financial statements and ratios.
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leveraging up
increasing gov debt. (gearing) - companies can invest further. but have to pay interest.
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Other cards in this set

Card 2

Front

why is equity risk capital

Back

if you can get it back the company will pay in dividends

Card 3

Front

annual report - valuation book vs market

Back

Preview of the front of card 3

Card 4

Front

JIT principle

Back

Preview of the front of card 4

Card 5

Front

asset turnover

Back

Preview of the front of card 5
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