Analyzing Common Stocks Flashcards
Ch 7
activity ratios
Financial ratios that are used to measure how well a firm is managing its assets. (Chapter 7)
balance sheet
A financial summary of a firm’s assets, liabilities, and shareholders’ equity at a single point in time. (Chapter 7)
total assets must equal the firm’s total debt and equity.
business cycle
An indication of the current state of the economy, reflecting changes in total economic activity over time. (Chapter 7)
common-stock (market) ratios
Financial ratios that convert key information about a firm to a per-share basis. (Chapter 7)
economic analysis
A study of general economic conditions that is used in the valuation of common stock. (Chapter 7)
fundamental analysis
The in-depth study of the financial condition and operating results of a firm. (Chapter 7)
starts w/ analyzing the firm’s financial history.
growth cycle
A reflection of the amount of business vitality that occurs within an industry (or company) over time. (Chapter 7)
income statement
A financial summary of the operating results of a firm covering a specified period of time, usually a year. (Chapter 7)
firm’s revenues minus expenses and ultimately the firm’s profits/ losses
industry analysis
Study of industry groupings that looks at the competitive position of a particular industry in relation to others and identifies companies that show particular promise within an industry. (Chapter 7)
industry structure, government regu, labor issues, demographic trends
intrinsic value
The underlying or inherent value of a stock, as determined through fundamental analysis. (Chapter 7) Also, the gross amount of money that an investor would receive if he or she chose to exercise an option. (Chapter 14)
leverage ratios
Financial ratios that measure the amount of debt being used to support operations and the ability of the firm to service its debt. (Chapter 7)
liquidity ratios
Financial ratios concerned with a firm’s ability to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due. (Chapter 7)
PEG ratio
A financial ratio that relates a stock’s price/earnings multiple to the company’s rate of growth in earnings. (Chapter 7)
profitability
Financial ratios that measure a firm’s returns by relating profits to sales, assets, or equity. (Chapter 7)
Ratio analysis
The study of the relationships between financial statement accounts. (Chapter 7)
investigate a firm’s liquidity or overall level of debt
Security analysis
The process of gathering and organizing information and then using it to determine the intrinsic value of a share of common stock. (Chapter 7)
Statement of cash flows
A financial summary of a firm’s cash flow and other events that caused changes in the company’s cash position. (Chapter 7)
Quick Ratio
The quick ratio is a more conservative estimate of the firm’s ability to meet its short-term obligations.
(current assests - inventories) / liabilities = ability to pay bills
Equity Multiplier
Divide total assets by stockholders’ equity
$2,397.4/$1,340.2 = 1.788 or 1.79
Return on Equity
Net Profit after taxes and dividing by shareholders equity
$101.9/$1,340.2 = .076 or 7.6%
Accounts Receivable Turnover
This ratio tells us how rapidly a firm collects on its credit sales or how many dollars of sales are generated per dollar invested in accounts receivable.
AR turnover = sales revenue / accounts receivable
Inventory Turnover
Sales divided by inventory
$1,569.5/$76.3 = 20.6 times.
Top-down approach to security analysis
The first step is to determine the current economic conditions and the potential impact on business. Second, investors using this approach will focus on industries expected to do well given the economic conditions. The final step is to identify companies within the selected industries that should fare well and conduct a thorough fundamental analysis on the firm’s financial condition and potential for growth.
Economic, industry, fundamental
debt-equity ratio
Long-term debt divided by stockholders’ equity
Payout Ratio
annual dividends divided by EPS
$0.45/$1.12 = .40
Net profit margin
net profit after taxes divided by sales
$101.9/$1,569.5 = .065 or 6.5%.
Current Ratio
current assets divided by current liabilities
$231.6 million / $146.7 million = 1.58
