Accounting & FS Analysis

Question 1

What is goodwill?

Answer 1

It is an amount recorded on the BS when a company pays more than net assets for an acquisition.

Question 2

Why is goodwill sometimes thought of as hidden assets?

Answer 2

Because it could include things like skilled employees, culture, experience, relationships with suppliers and customers, brand names, great management, exceptional clients etc. which are difficult to see represented in financial statements.

It might represent the good name, trust or brand of the company that has been developed over time, which has value over and above the net assets.

Goodwill is regarded as an intangible, versus a tangible like a truck, property equipment etc

Question 3

How do accounting rules treat goodwill?

Answer 3

It is not amortized over its useful life but periodically checked for impairment.

Question 4

What is it called when a company pays less than book value for an asset?

Answer 4

Negative goodwill.

Question 5

What do we do with Special dividends when calculating the BVPS growth rate?

Answer 5

We add the special dividend back to BV to include in the BVPS growth calculation.

Question 6

Working capital is…..?

Answer 6

the short term capital needed to run a company

Question 7

What is the working capital formula?

Answer 7

WC = Current Assets - Current Liabilities

Question 8

What is included in Current assets and current liabilities?

Answer 8

CA = AR + Cash + Inv + Mkt Securites + Prepaid Exp
CL = AP + Notes Payable + Accrued Expenses + ST Debt

Question 9

What is capital employed?

Answer 9

TA - CL

Question 10

What is ROCE?

Answer 10

Ebit or Op Earnings / TA-CL

Question 11

When evaluating debt, what are two key denominators used?

Answer 11

Equity and Assets

Question 12

What is the best way to evaluate debt?

Answer 12

See how long it will take to pay off.

Use LTD / FCF = Years

3 years is attractive

Question 13

What is another way of analyzing debt?

Answer 13

Look at interest, and see how easily earnings cover it

> 3x is good.

Question 14

Can we use net income to analyze debt?

Answer 14

Yes just like the interest coverage ratio, we can see how many years it would take of net income to pay off debt.

Question 15

What is the debt to total funding ratio?

Answer 15

Debt / (Debt + equity)

Question 16

What is a reasonable debt to total funding ratio?

Answer 16

Average is around 25%.

Above 50% would be considered high.

Question 17

What level of debt to equity is considered too high?

Answer 17

Greater than 100%.

Question 18

How can we use historic stock options to think about future dilution?

Answer 18

The historic level of stock option grants is probably a good indicator of future dilution and we can add this into our outstanding shares calculation going forward.

Question 19

What are some examples of companies managing earnings?

Answer 19

net income can be manipulated by rushing products out the door at the end of each quarter (thereby boosting revenue) or reducing assumptions for uncollectable accounts, warranty costs, depreciation, and the like.

Question 20

What relation between net income and operating cashflow would have me worried?

Answer 20

If operation cashflow was consistently trailing net income over time.

Question 21

According to Warren Buffett, what are the two ways that really good businesses make money?

Answer 21

By having a high-profit margin or by having high inventory turnover.

Question 22

What if Warren cant have both?

Answer 22

He will accept either high-profit margin business with low inventory turnover OR a lower profit margin with a high inventory turnover.

Question 23

What types of companies is Warren not interested in?

Answer 23

Those with low profit margins and low inventory turnover.