Accounts/Statements (+formulas), Analysis of a stock when buying, Funds,

Question 1

Capital Gains

Answer 1

The rise in the value of an asset over time

Question 2

Mutual Fund

Answer 2

A place where investors pool their money. The fund managers decides what percentages of the company pooled goes to which companies. If the fund performs well, the investors get a return and the fund manager takes a one or two percent management fee of the total money pooled

Question 3

Index

Answer 3

A collection of companies in a certain area

Question 4

Index Fund

Answer 4

A fund that invests in an index

Question 5

Inflation

Answer 5

The rising of prices of things over time

Question 6

Investment Portfolio

Answer 6

An investor’s collection of investments

Question 7

Quantitative Analysis includes analysing…

Answer 7

• Balance sheets
• Income statements
• Cash flow

Question 8

Balance sheet

Answer 8

Balances assets and liabilities

Question 9

How to check for level of risk when reading a balance sheet? (Current Ratio)

Answer 9

Using the calculation
Total Current Assets/Total Current Liabilities
we can work out the level of risk. This number should be above 1 (the higher the better)

Question 10

Income statements

Answer 10

Shows us the total revenue and net income

Question 11

Net Income

Answer 11

The money that a company makes after all the expenses have been deducted from their revenue, this shows the general performance of the company.

Question 12

3 Expenses a company has

Answer 12

1. Cost of goods sold
2. Operating expenses
3. EBIT (Earnings before interest and taxes)

Question 13

Current Assets

Answer 13

Assets that can easily be turned into cash within a year

Question 14

Fixed Assets

Answer 14

Assets and property that cannot easily be turned into cash, such as the headquarters of a company which are not casually sold

Question 15

Intangible assets (non-physical assets)

Answer 15

These are abstract assets, such as the brand recognition of an established business that has been trusted for generations

Question 16

Qualitative analysis

Answer 16

Not analyzing numbers but more the abstract qualities that make a company great.

Question 17

Acid Test Ratio

Answer 17

How well a company can pay its current liabilities

Current assets - inventory (stock) / Current liabilities

This information can be found on the balance sheet

Question 18

Net Profit Margin

Answer 18

Revenue - total expenses (Net Profit) / Total revenue x 100

Net Profit Margin shows the profitability of the business, for example if NPM is 10%, then that means for every one dollar of revenue, 0.10$ is earned net profit.

This information can be found on the income statement.

Question 19

What is the difference between the current ratio and the acid test ratio?

Answer 19

The acid test ratio is more “careful” when calculating if they can pay off current liabilities since it excludes inventory, which is harder/may take longer to liquidate.

Question 20

What are the two ways to increase net profit margin?

Answer 20

1. Increase revenue
2. Decrease expenses

Question 21

Gross profit margin

Answer 21

(Revenue - COGS / Revenue) x 100%

GPM also shows the profitability of a business but it only includes the direct cost of goods sold and completely ignores any indirect operating expenses.

This information can be found on the income statement.

Question 22

What is the COGS (Cost of good sold) ?

Answer 22

The costs of producing the good sold by a company. This includes the cost of the materials and labor directly used to create the good. It can also be know as the “cost of sales”

Question 23

Operating Margin

Answer 23

(Revenue - Operating costs + COGS / Revenue) x 100

OPM also shows the profitability of a business but it only takes away cost of goods sold and all operating expenses, ignoring interest expenses and tax expenses (Earning before interest and tax, EBIT). Look for above 15% when inspecting an income statement

Question 24

What are operating expenses?

Answer 24

Ongoing cost for running a business, for example research & development, depreciation & amortization, etc.

Question 25

Cash flow statement

Answer 25

A summary of a business’s cash inflows and outflows over a period of time.

Question 26

What is a red flag in cash flow statements when analyzing a company?

Answer 26

Free cash flow is negative but the company’s still paying dividends back to investors. This is unsustainable as the business will eventually run out of cash.

Question 27

How to read a cash flow statement when analyzing a company?

Answer 27

This statement compares the “opening cash” at the start of the time period to the “closing cash” at the end of the time period. Any change between these is called the “net increase/decrease in cash”.

Positive numbers represent cash inflow whilst negative numbers represent cash outflows.

Look out for increasing free cash flow year on year.

Question 28

What is free cash flow?

Answer 28

The amount of cash that is available for investors/stockholders after the extraction of all expenses from the total revenue.

Question 29

What is and why do we consider brand recognition when performing qualitative analysis?

Answer 29

Customers correlating a business’s product or service just by looking at its logos, slogans etc. Consumers are likely to trust a new product of a company that has good brand recognition which means loyalty and trust in the company.

Question 30

Why is “hype in the form of social media/news” not a good long-term strategy when performing qualitative analysis?

Answer 30

When a stock is being hyped up on social media platforms and on the news. This is not a good long-term investment strategy as a stock may be hyped up for a short time, causing the stock to go up, but will quickly plunge as the hype dies down.

Question 31

Why is what the face of a company says important when performing qualitative analysis?

Answer 31

Nowadays, even more important with social media, what the well-known leader of a company says is important as their comments can cause great change in the stock of their company going down or up. E.g. Elon musk tweets causing great changes in the stock/company.

Question 32

Why are growing industries important when performing qualitative analysis?

Answer 32

Growing industries are important to consider due to their high chance of prominence in the future. For example, electronic vehicle technology would mean investing in leading companies of this industry (Tesla) or the fact that AI will most likely replace most jobs in the future so investing in AI Technology.

Question 33

Why are changes in sectors in the future important to consider when performing qualitative analysis?

Answer 33

Changes in sectors in the future are important to analyze as they may have a negative or positive impact on the company you are considering, for example the inevitable change from gas to some sort of electricity in the future. Consider how these big changes will affect the company in the future.

Question 34

Return on capital employed

Answer 34

How much money they made back on the capital employed

(Net Profit / Capital employed) x 100