A summary of Chapter Two: Fundamental Analysis found in the following textbook - Introduction to Investment Management (revised edition) by Ms. A de Vries, Mr. DJ Smit, and Prof. PD Erasmus.
Answer: Determining the intrinsic value of shares by considering the current and expected financial performance.
2.
When are stocks or products undervalued?
Answer: When the current market value (market price) is less than the intrinsic value.
3.
When are stocks or products overvalued?
Answer: When the current market value (market price) is greater than the intrinsic value.
4.
What is an intrinsic value?
Answer: The anticipated or calculated value of a company, stock, currency, or product determined through the fundamental analysis. It includes tangible and intangible factors.
5.
Differentiate between a financial analysis and a technical analysis.
Answer: A financial analysis determines which shares to buy whereas a technical analysis focuses on the timing of the purchase.
6.
What are the four types of stakeholders?
Answer: 1. Current and Potential Shareholders
2. Current and Potential Providers of Debt Capital
3. Management and Employees
4. Diverse Groups (customers, etc.)
7.
What is the Statement of Profit or Loss?
Answer: The Statement of Profit or Loss provides a summary of an enterprise’s financial performance for a specific period (normally one year).
8.
Do Statements of Profit or Loss only represent cash flow items?
Answer: Represents all compensation received for products or services provided by the enterprise during the period under consideration.
10.
Define cost of sales.
Answer: Costs that were directly incurred to generate the revenue.
Content preview
AUGUST 19, 2022
FUNDAMENTAL ANALYSIS
CHAPTER TWO
IZEL BARNARD
BUSINESS MANAGEMENT 142
,Fundamental Analysis
Table of Contents
2.1. Introduction......................................................................................................................... 3
2.2. Stakeholders in Financial Analysis ....................................................................................... 3
2.3. Financial Statements ........................................................................................................... 4
2.3.1. Statement of Profit or Loss ........................................................................................... 4
2.3.2. Statement of Financial Position .................................................................................... 5
2.3.2.1. Assets .................................................................................................................... 7
2.3.2.2. Equity and Liabilities .............................................................................................. 8
2.4. Prerequisites for Financial Statements .............................................................................. 10
2.5. Ratios ................................................................................................................................. 11
2.5.1. Profitability ................................................................................................................. 11
1. Return on Total Assets ................................................................................................. 11
2. Return on Equity........................................................................................................... 11
3. Cost of Debt (return on debt capital) ........................................................................... 12
4. Return on Financial Assets ........................................................................................... 12
2.5.2. Profit Margins ............................................................................................................. 12
1. Gross Profit Margin ...................................................................................................... 12
2. Operating Profit Margin ............................................................................................... 12
3. EBIT-margin .................................................................................................................. 13
4. Net Profit Margin.......................................................................................................... 13
2.5.3. Liquidity ...................................................................................................................... 13
1. Current Ratio ................................................................................................................ 13
2. Acid Test Ratio .............................................................................................................. 14
2.5.4. Turnover Ratios and Times ......................................................................................... 14
1. Turnover Ratio and Time of Current Assets ................................................................. 15
2. Turnover Ratio and Time of PPE ................................................................................... 15
3. Turnover Ratio and Time of Trade Receivables ............................................................ 15
4. Turnover Ratio and Time of Inventory ......................................................................... 16
2.5.5. Solvency...................................................................................................................... 16
Debt-to-assets Ratio (Debt Ratio)..................................................................................... 16
2.5.6. Coverage Ratios .......................................................................................................... 16
1. Finance Cost Coverage ................................................................................................. 16
2. Ordinary Dividend Coverage......................................................................................... 17
Page 1 of 18
, Fundamental Analysis
2.5.7. Investment Ratios ....................................................................................................... 17
1. Earnings Per Share........................................................................................................ 17
2. Earnings Yield ............................................................................................................... 17
3. Dividend Per Share ....................................................................................................... 17
4. Dividend Yield ............................................................................................................... 17
5. Price-earnings Ratio...................................................................................................... 18
6. Book Value Per Share ................................................................................................... 18
Page 2 of 18
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