Business Management: Component 3 part 1

What is fundamental analysis?

Determining the intrinsic value of shares by analysing current and future financial performance.

How is intrinsic value calculated?

By discounting expected future income and dividends to present value.

What does it mean if the market price is below intrinsic value?

The share is undervalued — potentially a good buy.

What if the market price is above intrinsic value?

The share is overvalued — it may be overpriced.

What is the goal of financial analysis?

To evaluate the financial position of a company and determine which shares to buy.

Name the four main stakeholder groups in financial analysis.

Shareholders, debt holders, management, and other interested parties (clients, suppliers, competitors).

What are shareholders interested in?

Earnings (EPS) and dividends (DPS).

What are debt holders interested in?

The company’s ability to repay capital and interest.

What is management interested in?

Efficient decision-making and long-term survival.

What are the two key financial statements?

The Statement of Financial Position (SFP) and the Statement of Profit or Loss (SPL).

Which statement is focused on for analysis in this component?

The Statement of Profit or Loss.

What does the Statement of Financial Position show?

A company’s assets, equity, and liabilities at a specific date (year-end).

What are the two sides of the SFP?

Total assets = Total equity and liabilities.

What is the main distinction between current and non-current items?

Based on turnover period, liquidity, and physical characteristics.

What are non-current assets?

Assets used for more than one year (e.g., property, plant, and equipment).

At what value are non-current assets usually shown at? And why is that a weakness?

Original cost price. Cost price may not reflect current replacement value.

What is the solution?

Use a revaluation reserve.

How is carrying value calculated?

Cost price – accumulated depreciation.

What are examples of intangible assets?

Goodwill and patents.

What are financial assets?

Investments or loans to other parties (e.g., shares).

What are current assets and what are some examples

Assets expected to be converted to cash within one year. Inventories, trade receivables, cash, prepayments.

What are prepayments?

Expenses paid in advance for transactions in the next accounting period.

What does equity represent?

The total capital provided by shareholders.

How is ordinary share capital calculated?

Number of issued shares × average issue price.

What are non-distributable reserves?

Reserves that cannot be paid as dividends (e.g., revaluation or capital redemption reserves).

What are distributable reserves?

Reserves that can be paid out as dividends (e.g., retained earnings).

What does total ordinary shareholders’ equity consist of?

Ordinary share capital + non-distributable reserves + distributable reserves.

What do preference shareholders receive before ordinary shareholders?

: Fixed dividends and priority on payments.

What are cumulative preference shares?

Dividends accumulate if unpaid and must be paid later.

What are non-cumulative preference shares?

Missed dividends are not recovered.

What are participating preference shares?

May receive extra dividends if profits are high.

What are convertible preference shares?

Can be converted into a fixed number of ordinary shares.

What are redeemable preference shares?

Bought back by the company at par value on a future date.

What are non-current liabilities?

Long-term debt capital such as loans, mortgages, or debentures.

What are current liabilities?

Short-term debt due within one year, like trade payables or overdrafts.

What is a trade payable?

Amounts owed to suppliers for credit purchases.

What is a bank overdraft?

A facility allowing withdrawal beyond account balance, with high finance cost.

What are dividends payable?

Declared but unpaid dividends at year-end.

What are current tax liabilities?

Taxes owed but not yet paid.

What are the main characteristics of ordinary shares?

Voting rights, residual claim on assets, dividend entitlement, pre-emptive rights, and limited liability.

Do ordinary shareholders have a guaranteed dividend?

No — dividends depend on profits and board decisions.

Are ordinary shares liquid?

Yes, they are tradable and can generate capital gains.

What does the Statement of Profit or Loss show?

The company’s financial performance over a specific period (usually one year).

Does SPL reflect actual cash flows?

No — it includes non-cash items (depreciation, credit sales, etc.).

Give examples of non-cash flow items.

Depreciation, credit sales, credit purchases.

What is included under investment income?

Interest received and dividends from other companies.

What are the key qualities of good financial statements?

Relevant, reliable, understandable, objective, timely, comparable, and consistent.