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Topic 6: Analysis And Interpretation Of Financial Statements (Part 2)

Capital Structure Analysis
Proportion of debt financing relative to equity financing (=gearing or leverage) * Reflects the entity’s financing decisions
* Investments in assets are funded externally by liabilities, or internally by owner’s as shown in accounting equation (A=L+OE)

Debt to equity ratio:
Total liabilities/ Total equity x 100=x%

Debt ratio:
Total liabilities/ Total asset x 100=x%

Interest Servicing Ratio:
Financial risk of the entity can also be assessed through the interest coverage ratio (also referred to as times interest eared)

EBIT/Net finance cost= x times

Debt Coverage ratio:
* Debt needs to be serviced from cash flow, so it is useful to relate the entity’s cash generating capacity to it long-term debt * The ratio link cash flows from operating activities with long-term debt

Market Performance Analysis:
Net tangible asset backing per share (NTAB)
* Provides an indication of the book value of the entity’s tangible assets (as reported in the balance sheet) per ordinary shares on issue * Intangible assets, such as goodwill, are excluded from calculation due to the lack of identifiability (goodwill) or marketability

Earnings per share:
Profit available to ordinary shareholders/ weighted no. Of ordinary shares on issue= x cent/share

Operating Cash Flow Per Share:
Net cash flows from operating activities-Preference dividends/ weighted no. Of ordinary shares on issue= x cents/share

Dividend per share:
Dividend paid to ordinary shareholders in current period/ weighted no. Of ordinary shares on issue= x cents/share

Price Earnings Ratio (PER):
* A market value indicator that reflects the number of years of earnings that investors are prepared to pay to acquire a share at its current market price Price Earnings Ratio (PER):
* Highlights the market’s assessment of the future performance of a firm...
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