CHAPTER 2 – FUNDAMENTAL ANALYSIS
Photo by Stefan Els
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INTRODUCTION
Fundamental Analysis:
• Determining the intrinsic value of shares by considering current and future financial
performance
• Intrinsic value = discounting future income and dividends
• If current market value (market price) < intrinsic value: undervalued
• If current market value > intrinsic value: overvalued
Financial analysis is used to determine which shares to buy
To evaluate the financial position of a company – investigate financial statements using
financial ratios.
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STAKEHOLDERS IN FINANCIAL ANALYSIS
Four different groups of stakeholders:
• Shareholder: potential earnings EPS and DPS
• Debt: current amount of debt in the capital structure and if the business can
settle capital and interest payments
• Management: to ensure efficient decision-making; long-term survival of business
• Diverse groups (clients, competitors, suppliers): Not necessarily directly involved
in the activities of the business but also interested in the financial performance
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FINANCIAL STATEMENTS
-
Statement of financial position
-
Statement of profit or loss & comprehensive income
 For the purposes of this chapter, the focus is placed only on the Statement
of Profit or Loss since it contains the information required for the financial
analysis
-
Focus on Standardised financial statements
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STATEMENT OF FINANCIAL POSITION
• Summary of a company’s financial position on a specific date (year-end)
• Assets: amount of capital invested in assets
• Equity and liabilities: sources of capital
Summary of the capital obtained by, and application thereof in a company
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STATEMENT OF FINANCIAL POSITION
• Assets utilised for longer than one year
• Assets utilised for less than one year
• Included in the physical production process
of an enterprise
• Can be converted into cash relatively quick
and easy
Non-current
assets
Equity
Non-current
liabilities
Current assets
Distinction based on: Turnover period
Total assets
of capital, ease of realisation and
physical
characteristics
Economic and
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Current
liabilities
Total equity
and liabilities
STATEMENT OF FINANCIAL POSITION OF LMMR LTD AS AT 28 FEBRUARY 20X9
LMMR statements are provided in the PDF document on SUNLearn (Chapter 2: LMMR financial statements)
ASSETS
PPE at cost price
- Accumulated depreciation
Total PPE at carrying value
Goodwill
Patents at carrying value
Intangible assets
Share investments
Long-term loans granted (10%)
Financial assets
NON-CURRENT ASSETS
20X9
645 800
(32 900)
612 900
3 400
2 000
5 400
4 200
13 400
17 600
635 900
20X8
651 400
(22 300)
629 100
5 700
3 000
8 700
3 600
18 600
22 200
660 000
Inventory
Trade receivables
Cash
Prepayments
CURRENT ASSETS
TOTAL ASSETS
66 000
83 600
14 500
164 100
800 000
54 700
48 250
2 650
105 600
765 600
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7
EQUITY AND LIABILITIES
Ordinary share capital (20X9 = 260 000; 2018 = 240 000)
Revaluation reserve (Non distributable reserve)
Capital redemption reserve (Non distributable reserve)
General reserves (Distributable reserve)
Retained earnings (Distributable reserve)
Ordinary shareholders’ equity
Preference shares (5,5%)
Shareholders’ equity
EQUITY
20X9
423 193
48 500
25 057
496 750
100 000
596 750
596 750
20X8
384 000
40 500
24 200
448 700
100 000
548 700
548 700
Mortgage loan (12%)
Debentures (6,25%)
NON-CURRENT LIABILITIES
80 000
40 000
120 000
87 000
50 000
137 000
Trade payables
Short-term loans (12%)
Dividends payable
Bank overdraft (8%)
Current tax liabilities
CURRENT LIABILITIES
TOTAL EQUITY AND LIABILITIES
67 300
12 000
3 200
750
83 250
800 000
52 400
18 000
5 900
3 600
79 900
765 600
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STATEMENT OF FINANCIAL POSITION (SFP)
NON-CURRENT ASSETS:
Property, plant and equipment @ cost price
• Physical assets, e.g. property, equipment, vehicles, buildings
• Usually shown at the original cost price
• Major weakness of SFP: if assets are in use for long, the cost price no longer reflects
the replacement (current) value of the asset
• Solution: revaluation reserve
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STATEMENT OF FINANCIAL POSITION
NON-CURRENT ASSETS:
Accumulated depreciation
• Provided for in Statement of profit or loss, accumulated in SFP
• Indication of the total depreciation provided for PPE
PPE at carrying value
• PPE @ Carrying value = PPE @ cost price – accumulated depreciation
• Carrying value compared to proceeds when PPE is sold to determine gain/loss
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STATEMENT OF FINANCIAL POSITION (SFP)
NON-CURRENT ASSETS:
Intangible assets
• Goodwill and patents
• Utilised to generate an income
• Difficult to allocate monetary value
Financial assets
• Usually indicated at their original price, while their current market price can also be included.
• Investments (shares in other companies, listed/delisted)
• Loans to other parties
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STATEMENT OF FINANCIAL POSITION
CURRENT ASSETS:
Inventories
• Stock necessary for continuous operation
• Production vs retail
Trade receivables
• Outstanding portion of credit sales
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STATEMENT OF FINANCIAL POSITION
CURRENT ASSETS:
Cash
• Cash on hand (petty cash) and cash in bank accounts
• Also includes cash equivalents (short-term investments)
Prepayments
• Paid an expense before payment was required
• Payments made for transactions that will only occur in the following accounting
period
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STATEMENT OF FINANCIAL POSITION
EQUITY:
Ordinary share capital
• Proceeds from the sale of ordinary shares
• Represent the shareholders’ stake in the management of the company
• Ordinary share capital = # of issued ordinary shares X average issue price
Non-distributable reserves
• Reserves that cannot be paid out to ordinary shareholders as dividends
• Revaluation reserve and capital redemption reserves
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STATEMENT OF FINANCIAL POSITION
EQUITY:
Distributable reserves
• Can be paid out to ordinary shareholders as dividends
• Retained earnings
• General reserve
Ordinary shareholder’s equity
• Total shareholding of the company
• Ordinary share capital + non-distributable reserves + distributable reserves
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STATEMENT OF FINANCIAL POSITION
EQUITY:
Preference share capital
• Selling of preference shares
• Preference right above ordinary shareholders to receive dividends
• Fixed dividend proceed, guarantee of dividend payout
Shareholder’s equity
• Total capital provided by shareholders (ordinary + preference)
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STATEMENT OF FINANCIAL POSITION
LIABILITIES
NON-CURRENT LIABILITIES
• Interest bearing borrowings:
long-term debt capital where
interest payments and a final
redemption of the capital is
required
• Types:
• LT loans, mortgage loans,
debentures
CURRENT LIABILITES
• Short-term debt capital
• Less than one year
• Types:
• Trade payables, bank
overdraft, ST loans,
dividends payable, current
tax liabilities
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STATEMENT OF FINANCIAL POSITION
CURRENT LIABILITIES:
Trade payables
• Outstanding amount as a result of purchasing on credit
• Future obligation
Bank overdraft
• Overdraft facility on bank account
• Usually applied over short-term due to high finance costs
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STATEMENT OF FINANCIAL POSITION
CURRENT LIABILITIES:
Short-term loans
• Loans or portions of long-term debt expected to be redeemed in the following financial
year
Dividends payable
• Dividends declared but not yet paid by year-end
Current tax liabilities
• If the amount of tax that must be paid is known (calculated), but payment has not yet
been made
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MORE ON ORDINARY & PREFERENCE SHARES (p31)
ORDINARY SHARES
Characteristics
• Co-owners of the company
• Voting power (1 share = 1 vote)
• Vote on take-overs, mergers but not
amount of div they will receive
• Receive dividends – no legal right but
entitled to claim to the profits
• Pre-emptive right to new shares (to maintain
their % interest in company)
• Limited liability – only lose the value of
shares
• Shares are negotiable (tradable) & very
liquid
• Potential to generate capital gains • Last claim to assets & profit (after creditors,
SARS, pref SH)
PREFERENCE SHARES
Characteristics
• Voting power is limited or non-existent
• Fixed dividend guaranteed (% par value)
• Market price is more stable than ordinary SH
Types
• Cumulative: dividends accumulate and will be
paid when funds are available
• Non-cumulative: No outstanding dividends
from previous years will be paid back
• Participating: SH may receive a higher dividend
if company experiences a larger profit than
expected
• Convertible: Shares can be converted into a
fixed number of ordinary shares
• Redeemable: Shares bought back at par value
on a certain future date
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STATEMENT OF PROFIT OR LOSS
• Summary of a company’s financial performance for a specific period of time (usually one
year).
• Does not necessarily represent cash-flows as non-cash flow items (depreciation, credit sales
and credit purchases) are also included.
NOTES:
1. Opening inventory
+ Purchases
- Final inventory
Cost of sales
54 700
320 000
374 700
(66 000)
308 700
ADDITIONAL INFORMATION to the LMMR example
(in additional PDF document)
2. 50% of sales are cash sales; 90% of purchases are credit purchases.
3. The market price of ordinary shares at: 28/02/20X9
28/02/20X8
350c
280c
4. Ordinary share dividends of R28 000 were declared during the year.
5. During the year, a vehicle was sold at a profit of R6 000, and equipment was sold at a loss of R640.
6. Assume
effective
tax| EyeNzululwazi
rate of 30%.
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Management
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STATEMENT OF PROFIT OR LOSS OF LMMR LTD FOR THE YEAR ENDED
28 FEBRUARY 20X9
Revenue
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain on the disposal of PPE (vehicle)
- Loss on the disposal of PPE (equipment)
- Finance costs
PROFIT before TAX
- Income tax expense (30%)
PROFIT after TAX
- Preference share dividends
ATTRIBUTABLE EARNINGS
- Transfer to general reserves
- Ordinary share dividends
RETAINED EARNINGS
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460 450
(308 700)
151 750
(85 400)
66 350
2 400
6 000
(640)
(13 600)
60 510
(18 153)
42 357
(5 500)
36 857
(8 000)
(28 000)
857
STATEMENT OF PROFIT OR LOSS OF LMMR LTD
FOR THE YEAR ENDED 28 FEBRUARY 20X9
Compensation for products or services delivered
460 450
Opening inventory + purchases – Closing inventory
- Cost of sales
Profit from sales activities
GROSS PROFIT
151 750
- Operating expenses
(85 400)
Eg. Wages, salaries, depreciation
Profit from primary activities
Interest received on loans granted; dividends received on share
investments
Total investment income (in SPL)
= R2 400
- Interest received (R13 400 x 10%) = R1 340
= Dividends received
= R1 060
Gain: SP > CV; Loss: SP < CV
-
Revenue
OPERATING PROFIT
(308 700)
66 350
+ Investment income (interest = R1 340 + Div = ?)
2 400
+ Gain on the disposal of PPE (vehicle) (note 5)
6 000
- Loss on the disposal of PPE (equipment) (note 5)
(640)
Interest paid on long-term and short-term interest bearing debt
- Finance costs
Mortgage loan: R 80 000 x 12% = 9 600
Debentures: R40 000 x 6.25%
= 2 500
PROFIT before TAX
Short-term loans: R12 000 x 12% = 1440
Economic
and Management
Bank
overdraft:
R750 xSciences
8% | EyeNzululwazi
= 60 ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
(13 600)
60 510
STATEMENT OF PROFIT OR LOSS OF LMMR LTD
FOR THE YEAR ENDED 28 FEBRUARY 20X9
PROFIT before TAX
60 510
- Income tax expense (30%)
Profit available to pay preference share dividends
% of preference share capital amount in SFP
Profit available to pay ordinary dividends
Difference between opening and closing balance in SFP
Cent amount per ordinary share x number of shares; additional information
Reinvested into the enterprise (part of distributable reserves)
= Difference between opening and closing balances in SFP
(18 153)
PROFIT after TAX
42 357
- Preference share dividends (R100 000 x 5.5%)
(5 500)
ATTRIBUTABLE EARNINGS
36 857
- Transfer to general reserves (48 500 – 40 500)
(8 000)
- Ordinary share dividends (note nr.4)
(28 000)
RETAINED EARNINGS (25 057 – 24 200)
EQUITY AND LIABILITIES
General reserves (Distributable reserve)
Retained earnings (Distributable reserve)
Ordinary shareholders’ equity
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20X9
48 500
25 057
496 750
857
20X8
40 500
24 200
448 700
2.4 PREREQUISITES FOR FINANCIAL STATEMENTS & RATIOS (P32)
1. Relevant & must contain necessary information that is required
2. Information - reliable & complete
3. Statements must be understandable for the users thereof
4. Objective version of company’s financial situation
5. Timely because since outdated information is of no value
6. Statements must be comparable and therefore information should be dealt with in a
consistent manner.
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Questions with solutions textbook
Question 22 - Page 25
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Statement of financial position of Snoekie Ltd.
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Statement of financial position of Snoekie Ltd.
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Revenue
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
- Loss with disposal of PPE
- Finance cost
PROFIT before TAX
- Income tax expense (30%)
PROFIT after TAX
- Preference share dividends
ATTRIBUTABLE EARNINGS
- Ordinary share dividends declared
- Transfer to general reserves
RETAINED EARNINGS
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80 000
(52 000)
28 000
(9 200)
18 800
1 200
(140)
(1 660)
18 200
(5 460)
12 740
(240)
12 500
(5 000)
(1 000)
6 500
FINANCIAL RATIOS
• Used to evaluate the financial performance of a company
Ratios must meet the following requirements:
1.
Meaningful comparison: relationship needs to be relevant
2.
Provide true indication: only include relevant amounts
3.
Comparable over time
31
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CLASSIFICATION OF RATIOS
1.
Profitability, rate of return
%
2.
Profit margins
%
3.
Liquidity
no unit
4.
Turnover ratios and time
times / days
5.
Solvency
%
6.
Coverage ratios
times
7.
Investment ratios
varies
IMPORTANT: NOTE THE USE OF AVERAGE VALUES FOR SFP ITEMS FOR CALCULATING
CERTAIN RATIOS
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1. PROFITABILITY
• Effectiveness in utilising capital (assets) to generate income
• Possible to calculate the profitability of different capital items.
• Total Assets
• Shareholders’ Equity
• Debt Capital
• Financial assets
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The following ratios are based on the financial statements of LMMR Ltd.
1. Return on total assets
Ro = Operating profit + Investment Income x 100
1
Average total assets
=
66 350 + 2 400
0,5(800 000 + 765 600)
=
8.78%
x
100
1
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1. PROFITABILITY
2.
Return on equity
Re =
Operating profit + investment income − finance cost 100
×
Average equity
1
=
66 350 + 2 400 − 13 600
x
0,5(596 750 + 548 700)
=
9.63%
100
1
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1. PROFITABILITY
3.
Cost of debt (return on debt capital)
Finance costs
100

Rv =
Average debt capital
1
=
13 600
0,5(203 250 + 216 900)
x
100
1
Non-current liabilities + current liabilities (20x9)
= 6.47%
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1. PROFITABILITY
4.
Return on financial assets
=
=
Investment income
100
×
Average financial assets
1
2 400
0,5(17 600 + 22 200)
x
100
1
= 12.06%
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2. Profit margins
• Percentage of revenue (sales) that is eventually realised as some
form of profit:
• Gross Profit
• Operating Profit
• EBIT (earnings before interest and tax)
• Net Profit
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2. Profit margins
1A.
Gross profit margin
Gross profit 100
×
=
Revenue
1
=
=
151 750 100
×
460 450
1
32.96%
1B.
Mark-up percentage
Gross profit 100
=
×
Cost of sales
1
=
151 750 100
×
308 700
1
=
49.16%
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PROFIT MARGINS: Example (not LMMR percentages)
R
Revenue
Gross profit
margin
(%)
Mark-up
percentage
(%)
125
100
25
Cost of sales
80 000
100
80
Gross profit
20 000
20
100 000
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2. Profit margins
2.
Operating profit margin
=
Operating profit 100
×
Revenue
1
=
66 350 100
×
460 450
1
=
14.41%
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2. Profit margins
3.
EBIT-margin
=
=
=
Profit before tax + finance cost 100
×
Revenue
1
60 510 + 13 600 100
×
460 450
1
16.10%
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2. Profit margins
4.
Net profit margin
=
Profit after tax 100
×
Revenue
1
=
42 357 100
×
460 450
1
=
9.20%
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3. Liquidity
• Enterprise’s ability to meet short-term liabilities
• Sufficient current assets cover current liabilities
• Insufficient liquidity can eventually lead to solvency problems
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3. Liquidity
1. Current ratio
Current assets
= Current liabilities
164 100
=
83 250
=
1.97 (no unit)
2. Acid test ratio (Quick ratio)
=
Current assets− Inventory − Prepayments
Current liabilities
= 164 100 − 66 000 − 0
83 250
=
1.18 (no unit)
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4. Turnover Ratios & -Times
Turnover Ratio: How many times per year the value of certain assets are transformed
into turnover / sales
Turnover Time: How many days it takes to turn the value of certain assets into
turnover / sales once
1. Current Assets
2. PPE
3. Trade Receivables
4. Inventory
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4. Turnover Ratios & -Times
There are two ways a Turnover ratio/time question could be asked:
1. Given an amount of information (word problem)
2. Given financial statement information
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EXAMPLE (page 38):
An enterprise invests R500 in inventories. It is possible to sell the items
either on cash or on credit terms. The sales price amounts to R750
(thus a markup of 50%). The inventories are sold after 15 days. If cash
sales are used, the income will be collected immediately, and it can be
reinvested in inventories again. If credit sales are used, the trade
receivables will only pay a further 15 days after the transaction takes
place (at the end of the month). The effect of the two sales methods
on the profit of the enterprise can be calculated as follows:
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4. Turnover Ratios & -Times
CASH SALES
1 April
Invest R500 in
inventory
15 April
30 April
15 Days
15 Days (30th)
Sell: R750
Receive: R750
(Profit: R250)
Sell: R750
Receive: R750
(Profit: R250)
Invest R500 in
inventory
Turnover ratio per month
2 times
Profit per transaction
R250
Total profit per month
R500
Return on investment per month
R500/R500 x 100/1 = 100%
Investment
required
to make
R1 000
profit
per| Ekonomiese
monthen Bestuurswetenskappe R1 000
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4. Turnover Ratios & -Times
CREDIT SALES
1 April
Invest R500 in
inventory
15 April
30 April
15 Days
15 Days (30th)
Sell: R750
Receive: R0
Receive: R750
(Profit: R250)
Turnover ratio per month
1 time
Profit per transaction
R250
Total profit per month
R250
Return on investment per month
R250/R500 x 100/1 = 50%
Investment required to make R1 000 profit per month
R2 000
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4. Turnover Ratios & -Times
Turnover ratio of current assets
=
Net revenue
Average current assets
=
460 450
0,5(164 100 + 105 600)
=
3.41 times
Number of times per year that current assets are
converted into revenue
Turnover time of current assets
=
Average current assets
360
×
Net revenue
1
= 0.5(164 100  105 600) x 360
460 450
=
105.43 days
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1
How long does one conversion cycle take?
4. Turnover Ratios & -Times
Turnover ratio of PPE
Net revenue
=
Average PPE @ carrying value
=
460 450
0,5(612 900 + 629 100)
= 0.74 times
Turnover time of PPE
= Average PPE @ carrying value × 360
Net revenue
= 0,5(612 900 + 629 100)
460 450
=
485.53 days
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1
x
360
1
4. Turnover Ratios & -Times
Turnover ratio of trade receivables
=
Credit revenue
Average trade receivables
=
460 450 x 50%
0,5(83 600 + 48 250)
=
3.49 times
Turnover time of trade receivables
=
=
Average trade receivables
360
×
Credit revenue
1
0,5(83 600 + 48 250)
230 225
= 103.09 days
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
x
360
1
4. Turnover Ratios & -Times
Turnover ratio of inventory
=
Cost of sales
Average inventory
=
308 700
0,5(66 000 + 54 700)
=
5.12 times
Turnover time of inventory
=
Average inventory
360
×
Cost of sales
1
= 0,5(66 000 + 54 700)
308 700
=
70.38 days
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
x
360
1
5. Solvency
Ability of company to meet all its financial obligations
over the long-term.
1. Debt-to-assets ratio (Debt ratio)
=
=
Debt capital 100
×
Total assets
1
120 000 + 83 250
800 000
OR
x
Debt capital 100
×
Total capital
1
100
1
= 25.41%
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
6. Coverage ratios
•
•
The ability to meet certain obligations.
All the ratios focus on an obligation and then compare it to the profits available to pay
that particular obligation:
1. Finance cost cover
Profit before finance cost and tax
=
Finance cost
= 60 510 + 13 600
13 600
= 5.45 times
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
6. Coverage ratios
2. Ordinary dividend coverage
=
=
Earnings per share
Dividend per share
14,74
11,20
OR
Earnings yield
Dividend yield
=
4.2%
3.2%
OR
Profit after tax − PS dividends
Ordinary dividends declared
=
= 1.32 times
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
42 357 − 5 500
28 000
7. Investment ratios
Attributable earnings
Earnings per share =
Average number of ordinary shares issued
=
36 857
0,5(260 000 + 240 000)
=
14.74 cents
Earnings per share
100
Earnings yield =
×
Market price per share
1
14,74
=
350
=
x
100
1
4.21%
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
7. Investment ratios
Ordinary dividends declared
Dividend per share =
Average number of ordinary shares issued
28 000
=
0,5(260 000 + 240 000)
= 11.2 cents per share
Dividend per share
100
Dividend yield =
𝑥
Market price per share 1
11,20
100
x
=
1
350
= 3.2%
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
7. Investment ratios
Market price per share
Price−earnings ratio =
Earnings per share
=
350
14,74
=
23.74 (no unit)
How much Rand investors are willing to pay for every R1 of EPS
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
7. Investment ratios
Book value per share
Shareholder′s equity − preference shares−intangible assets
=
Number of ordinary shares issued
At year end – not average number of shares
= 596 750 − 100 000 − 5 400
260 000
=
R1.89 / 188.98c per share
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
.
PRACTICAL EXERCISE:
Olympics Ltd. (PDF version of question on SUNLearn)
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
Practical exercise: Olympics Ltd.
Statement of financial position
PPE at cost price
- Accumulated depreciation
PPE at carrying value
Goodwill
Intangible assets
Long-term loans granted (10%)
Share investments
Financial assets
NON-CURRENT ASSETS
Trade receivables
Inventory
Cash and cash equivalents
Prepayments
CURRENT ASSETS
TOTAL ASSETS
20X5
175 000
(42 400)
132 600
4 000
4 000
3 400
10 000
13 400
150 000
13 700
19 000
16 600
700
50 000
200 000
65
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20X4
160 000
(37 800)
122 200
4 000
4 000
2 800
6 000
8 800
135 000
11 200
16 400
12 100
300
40 000
175 000
EQUITY AND LIABILITIES
Ordinary share capital
(20X5: 35 000; 20X4: 27 000)
General reserve
Retained earnings
Ordinary shareholders’ equity
Preference share capital (9%)
Shareholders’ equity
EQUITY
Mortgage loan (5%)
Long-term loan (7%)
Debentures (6%)
NON-CURRENT LIABILITIES
Trade payables
Bank overdraft (10%)
Dividends payables
Current tax liabilities
CURRENT LIABILITIES
TOTAL EQUITY AND LIABILITIES
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20x5
80 000
20x4
56 500
9 000
89 000
6 000
95 000
95 000
50 000
9 000
20 000
79 000
18 100
6 700
800
400
26 000
200 000
5 500
62 000
10 000
72 000
72 000
60 000
3 000
16 000
79 000
12 500
9 800
1 200
500
24 000
175 000
Practical exercise: Olympics Ltd.
STATEMENT OF PROFIT OR LOSS
REVENUE
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain with disposal of PPE
- Finance costs
(2 500 + 630 + 1 200 + 670)
PROFIT BEFORE TAX
- Income tax expense (28%)
PROFIT AFTER TAX
- Preference dividends
ATTRIBUTABLE EARNINGS
- Ordinary dividends declared
- Transfer to general reserve
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20x5
125 000
50 000
(23 700)
750
500
Return on total assets:
Ro = Operating profit + Investment Income x 100
1
Average total assets
100
1
Statement of financial position
PPE at cost price
- Accumulated depreciation
PPE at carrying value
Goodwill
Intangible assets
Long-term loans granted (10%)
Share investments
Financial assets
NON-CURRENT ASSETS
Trade receivables
Inventory
Cash and cash equivalents
Prepayments
CURRENT ASSETS
TOTAL ASSETS
STATEMENT OF PROFIT OR LOSS
REVENUE
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain with disposal of PPE
- Finance costs
(2 500 + 630 + 1 200 + 670)
PROFIT BEFORE TAX
- Income tax expense (28%)
PROFIT AFTER TAX
- Preference dividends
ATTRIBUTABLE EARNINGS
- Ordinary dividends declared
- Transfer to general reserve
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
=
=
26 300 + 750
0,5(200 000 + 175 000)
x
20X5
175 000
(42 400)
132 600
4 000
4 000
3 400
10 000
13 400
150 000
13 700
19 000
16 600
700
50 000
200 000
20X4
160 000
(37 800)
122 200
4 000
4 000
2 800
6 000
8 800
135 000
11 200
16 400
12 100
300
40 000
175 000
20x5
125 000
(75 000)
50 000
(23 700)
26 300
750
500
(5 000)
22 550
(6 314)
16 236
(540)
15 696
(12 196)
-
Return on financial assets:
=
Investment income
100
×
Average financial assets
1
=
750
0,5(13 400 + 8 800)
x
100
1
Statement of financial position
PPE at cost price
- Accumulated depreciation
PPE at carrying value
Goodwill
Intangible assets
Long-term loans granted (10%)
Share investments
Financial assets
NON-CURRENT ASSETS
Trade receivables
Inventory
Cash and cash equivalents
Prepayments
CURRENT ASSETS
TOTAL ASSETS
STATEMENT OF PROFIT OR LOSS
REVENUE
- Cost of sales
GROSS PROFIT
=
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain with disposal of PPE
- Finance costs
(2 500 + 630 + 1 200 + 670)
PROFIT BEFORE TAX
- Income tax expense (28%)
PROFIT AFTER TAX
- Preference dividends
ATTRIBUTABLE EARNINGS
- Ordinary dividends declared
- Transfer to general reserve
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20X5
175 000
(42 400)
132 600
4 000
4 000
3 400
10 000
13 400
150 000
13 700
19 000
16 600
700
50 000
200 000
20X4
160 000
(37 800)
122 200
4 000
4 000
2 800
6 000
8 800
135 000
11 200
16 400
12 100
300
40 000
175 000
20x5
125 000
(75 000)
50 000
(23 700)
26 300
750
500
(5 000)
22 550
(6 314)
16 236
(540)
15 696
(12 196)
-
Net profit margin:
STATEMENT OF PROFIT OR LOSS
=
Profit after tax
Revenue
=
16 236
125 000
=
x
100
1
x
100
1
REVENUE
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain with disposal of PPE
- Finance costs
(2 500 + 630 + 1 200 + 670)
PROFIT BEFORE TAX
- Income tax expense (28%)
PROFIT AFTER TAX
- Preference dividends
ATTRIBUTABLE EARNINGS
- Ordinary dividends declared
- Transfer to general reserve
RETAINED EARNINGS
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20x5
125 000
(75 000)
50 000
(23 700)
26 300
750
500
(5 000)
22 550
(6 314)
16 236
(540)
15 696
(12 196)
3 500
Current ratio:
Current assets
=
Current liabilities
=
50 000
26 000
Statement of financial position
PPE at cost price
- Accumulated depreciation
PPE at carrying value
Goodwill
Intangible assets
Long-term loans granted (10%)
Share investments
Financial assets
NON-CURRENT ASSETS
Trade receivables
Inventory
Cash and cash equivalents
Prepayments
CURRENT ASSETS
TOTAL ASSETS
EQUITY AND LIABILITIES
Ordinary share capital (20X5: 35 000; 20X4: 27 000)
General reserve
Retained earnings
=
Ordinary shareholders’ equity
Preference share capital (9%)
Shareholders’ equity
EQUITY
Mortgage loan (5%)
Long-term loan (7%)
Debentures (6%)
NON-CURRENT LIABILITIES
Trade payables
Bank overdraft (10%)
Dividends payables
Current tax liabilities
CURRENT LIABILITIES
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
TOTAL EQUITY AND LIABILITIES
20X5
175 000
(42 400)
132 600
4 000
4 000
3 400
10 000
13 400
150 000
13 700
19 000
16 600
700
50 000
200 000
20X4
160 000
(37 800)
122 200
4 000
4 000
2 800
6 000
8 800
135 000
11 200
16 400
12 100
300
40 000
175 000
20x5
80 000
9 000
89 000
6 000
95 000
95 000
50 000
9 000
20 000
79 000
18 100
6 700
800
400
26 000
200 000
20x4
56 500
5 500
62 000
10 000
72 000
72 000
60 000
3 000
16 000
79 000
12 500
9 800
1 200
500
24 000
175 000
Statement of financial position
PPE at cost price
- Accumulated depreciation
PPE at carrying value
Goodwill
Intangible assets
Long-term loans granted (10%)
Share investments
Financial assets
NON-CURRENT ASSETS
Trade receivables
Inventory
Cash and cash equivalents
Prepayments
CURRENT ASSETS
TOTAL ASSETS
Debt-to-asset ratio:
=
Debt capital 100
×
Total assets
1
EQUITY AND LIABILITIES
Ordinary share capital (20X5: 35 000; 20X4: 27 000)
General reserve
Retained earnings
Ordinary shareholders’ equity
Preference share capital (9%)
Shareholders’ equity
EQUITY
Mortgage loan (5%)
Long-term loan (7%)
Debentures (6%)
NON-CURRENT LIABILITIES
Trade payables
Bank overdraft (10%)
Dividends payables
Current tax liabilities
CURRENT LIABILITIES
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
TOTAL EQUITY AND LIABILITIES
=
=
79 000 + 26 000
200 000
x
100
1
20X5
175 000
(42 400)
132 600
4 000
4 000
3 400
10 000
13 400
150 000
13 700
19 000
16 600
700
50 000
200 000
20X4
160 000
(37 800)
122 200
4 000
4 000
2 800
6 000
8 800
135 000
11 200
16 400
12 100
300
40 000
175 000
20x5
80 000
9 000
89 000
6 000
95 000
95 000
50 000
9 000
20 000
79 000
18 100
6 700
800
400
26 000
200 000
20x4
56 500
5 500
62 000
10 000
72 000
72 000
60 000
3 000
16 000
79 000
12 500
9 800
1 200
500
24 000
175 000
Finance cost cover:
STATEMENT OF PROFIT OR LOSS
=
=
=
Profit before finance cost and tax
Finance cost
22 550 + 5 000
5 000
REVENUE
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain with disposal of PPE
- Finance costs
(2 500 + 630 + 1 200 + 670)
PROFIT BEFORE TAX
- Income tax expense (28%)
PROFIT AFTER TAX
- Preference dividends
ATTRIBUTABLE EARNINGS
- Ordinary dividends declared
- Transfer to general reserve
RETAINED EARNINGS
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20x5
125 000
(75 000)
50 000
(23 700)
26 300
750
500
(5 000)
22 550
(6 314)
16 236
(540)
15 696
(12 196)
3 500
STATEMENT OF PROFIT OR LOSS
Earnings per share:
=
=
=
Attributable earnings
Average number of ordinary shares issued
15 696
0,5(35 000 + 27 000)
REVENUE
- Cost of sales
GROSS PROFIT
- Operating expenses
OPERATING PROFIT
+ Investment income
+ Gain with disposal of PPE
- Finance costs
(2 500 + 630 + 1 200 + 670)
PROFIT BEFORE TAX
- Income tax expense (28%)
PROFIT AFTER TAX
- Preference dividends
ATTRIBUTABLE EARNINGS
- Ordinary dividends declared
- Transfer to general reserve
RETAINED EARNINGS
EQUITY AND LIABILITIES
Ordinary share capital (20X5: 35 000; 20X4: 27 000)
General reserve
Retained earnings
Ordinary shareholders’ equity
Preference share capital (9%)
Shareholders’ equity
EQUITY
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
20x5
125 000
(75 000)
50 000
(23 700)
26 300
750
500
(5 000)
20x5
80 000
9 000
89 000
6 000
95 000
95 000
22 550
(6 314)
16 236
(540)
15 696
(12 196)
3 500
20x4
56 500
5 500
62 000
10 000
72 000
72 000
Price-earnings ratio:
Market price per share
Price−earnings ratio =
Earnings per share
=
800
50,63
=
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
FINANCIAL RATIOS ANSWERS
Practical exercise: Olympics Ltd.
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe
Additional exercises with voice notes on SUNLearn
• Questions & Solutions Textbook:
– Problem 1, Page 13 – See additional slides with voice notes
• Additional exercise with financial statements and ratios – see
additional slides with voice notes.
Economic and Management Sciences | EyeNzululwazi ngoQoqosho noLawulo | Ekonomiese en Bestuurswetenskappe