Accounting & FS Analysis Flashcards
What is goodwill?
It is an amount recorded on the BS when a company pays more than net assets for an acquisition.
Why is goodwill sometimes thought of as hidden assets?
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
How do accounting rules treat goodwill?
It is not amortized over its useful life but periodically checked for impairment.
What is it called when a company pays less than book value for an asset?
Negative goodwill.
What do we do with Special dividends when calculating the BVPS growth rate?
We add the special dividend back to BV to include in the BVPS growth calculation.
Working capital is…..?
the short term capital needed to run a company
What is the working capital formula?
WC = Current Assets - Current Liabilities
What is included in Current assets and current liabilities?
CA = AR + Cash + Inv + Mkt Securites + Prepaid Exp CL = AP + Notes Payable + Accrued Expenses + ST Debt
What is capital employed?
TA - CL
What is ROCE?
Ebit or Op Earnings / TA-CL
When evaluating debt, what are two key denominators used?
Equity and Assets
What is the best way to evaluate debt?
See how long it will take to pay off.
Use LTD / FCF = Years
3 years is attractive
What is another way of analyzing debt?
Look at interest, and see how easily earnings cover it
> 3x is good.
Can we use net income to analyze debt?
Yes just like the interest coverage ratio, we can see how many years it would take of net income to pay off debt.
What is the debt to total funding ratio?
Debt / (Debt + equity)
What is a reasonable debt to total funding ratio?
Average is around 25%.
Above 50% would be considered high.
What level of debt to equity is considered too high?
Greater than 100%.
How can we use historic stock options to think about future dilution?
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.
What are some examples of companies managing earnings?
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.
What relation between net income and operating cashflow would have me worried?
If operation cashflow was consistently trailing net income over time.
According to Warren Buffett, what are the two ways that really good businesses make money?
By having a high-profit margin or by having high inventory turnover.
What if Warren cant have both?
He will accept either high-profit margin business with low inventory turnover OR a lower profit margin with a high inventory turnover.
What types of companies is Warren not interested in?
Those with low profit margins and low inventory turnover.
