Business management: Component 3 part 2

What is the purpose of financial ratios?

To evaluate a company’s performance and financial position using standardized relationships between financial statement ite

What are the three requirements for useful ratios?

1. Meaningful comparisons

2. True reflection of performance 

3. Consistency over time.

What must be used for SFP items when calculating ratios?

Average values (beginning + end ÷ 2).

List the seven categories of financial ratios.

Profitability, Profit Margins, Liquidity, Turnover Ratios/Times, Solvency, Coverage Ratios, Investment Ratios.

What do profitability ratios measure?

How effectively a company uses its capital or assets to generate income.

What do profit margins measure?

The percentage of revenue realized as different levels of profit.

What do liquidity ratios measure?

A company’s ability to meet short-term obligations.

What does a turnover ratio show?

How many times per year a specific asset is converted into sales.

What does turnover time show?

How many days it takes for one conversion cycle.

What does solvency measure?

The firm’s ability to meet all long-term financial obligations.

What do coverage ratios indicate?

How easily a company can meet specific fixed obligations.

What does a high PE ratio indicate?

Investors expect high future growth and are willing to pay more for each rand of earnings.

What are corporate actions?

Decisions by management that affect issued securities and shareholder value.

Types of corporate actions?

Mandatory (e.g., dividends, bonus issues, mergers) and voluntary/elective (e.g., rights issues, share buy-backs).

What are dividends and types of dividends

Portion of profit distributed to shareholders after tax, Interim (after 6 months) and Final (at year-end).

List the key dividend timeline events (JSE T + 3 rule).

Announcement → Cum-dividend → Ex-dividend → Record Date → Payment Date.

When must the announcement occur?

At least 13 business days before the record date.

What is a capitalisation/bonus issue?

Free shares issued to existing shareholders in a fixed ratio, financed from distributable reserves.

Purpose of a bonus issue?

To reward shareholders and increase share liquidity when cash dividends are limited.

Effect on SFP?

Increase in ordinary share capital; equal decrease in reserves; total equity unchanged.

How does a bonus issue affect share price and ownership percentage?

Market price falls proportionally; percentage ownership remains unchanged if shares are kept.

What is a subdivision (stock split)?

Each share is divided into several lower-value shares to reduce market price and improve affordability.

What is share consolidation?

Combining multiple low-value shares into one higher-value share; reduces number of shares, raises price.

Do total shareholder funds change in a split or consolidation?

No – total equity remains the same.

Why do companies repurchase their own shares?

To use excess cash, improve EPS, and increase shareholder value.

What law governs share buy-backs in South Africa?

Companies Act 71 of 2008.

Key JSE listing requirements for buy-backs?

Max 20 % of issued shares; buy-back price ≤ 10 % above 5-day weighted average; announce every 3 %.

What must a company prove before a buy-back?

It remains solvent and liquid afterward.

What is a rights issue?

An offer to existing shareholders to buy new shares, usually below market price, in proportion to holdings.

Purpose of a rights issue?

To raise additional capital while giving existing shareholders priority to maintain their ownership percentage.

Formula for Number of New Shares?

New Shares=Capital Required​/Issue Price

Formula for Issue Ratio (N)?

N=Existing Shares​/New Shares

Advantages and Disadvantages of a rights issue for investors?

Expansion opportunities and discounted issue price. Need to invest more to keep percentage holding; short-term dilution of EPS.

List key stages of a rights issue.

Announcement → Cum-rights period → Ex-rights period → Record date → Closing date.

When does the Ex-rights period start?

The business day after the last Cum-rights trading day.

How long is the “No Dematerialisation” period?

3 business days (from start of Ex-rights to Record date).

Formula for Value of a Right (Cum-rights period)?

V=M−S​/N+1
where M = market price per share, S = issue price, N = issue ratio.

Formula for Value of Right (Ex-rights period)?

V=M\*−S/N

What is underwriting?

A financial institution guarantees to buy any shares not taken up, for a fee.

Why is underwriting important?

It ensures the company raises the required capital and signals investor confidence.

Effect of a bonus issue?

Ordinary share capital ↑, reserves ↓ (same total equity).

Effect of a stock split?

More shares issued at lower price; total share capital unchanged.

Effect of a rights issue?

Ordinary share capital ↑, total equity ↑ (new cash inflow).