Book 3_Equity_READING 45_COMPANY ANALYSIS_PAST AND PRESENT

Question 1

Key items typically included in an initial company research report

Answer 1

• Front matter (e.g., issuer name, buy/hold/sell recommendation, target buy/sell
  prices, and legal disclosures)
• Recommendation, including rationales behind the recommendation
• Company description
• Industry overview and competitive positioning
• Financial analysis
• Valuation
• ESG factors
• Risks and their valuation impact

Question 2

Key items typically included in a subsequent company research report

Answer 2

• Front matter
• Changes in recommendation with rationales
• Analysis of new information
• Changes in valuation and risks

Question 3

general types of information to determine a company’s business model:

Answer 3

1. Information directly from the company (e.g., annual or quarterly regulatory filings, investor presentations, press releases, investor relations department, website)
2. Publicly available third-party information (e.g., analyst reports, government research and reports, news outlets, social media)
3. Proprietary third-party information (e.g., analyst reports, Bloomberg)
4. Proprietary primary research, performed or commissioned by the analyst (e.g., surveys, market studies)

Question 4

A business model

Answer 4

considers a company’s products and services, customers, sales channels, pricing and payment terms, and reliance on key suppliers

Question 5

Revenue drivers

Answer 5

can be analyzed bottom-up based on financial statements or top down based on economic and industry factors

Question 6

Pricing power

Answer 6

• is a function of market structure and a company’s competitive position in the market
• Companies in highly competitive markets have low pricing power.
• Pricing power for companies in less competitive markets may result from greater product differentiation, lack of good substitutes, high barriers to entry, high customer loyalty, and high switching costs

Question 7

Commoditization

Answer 7

• describes an industry that is evolving toward this state as more participants enter the market.
• participants tend to innovate less and imitate each other more.

Question 8

Operating profit

Answer 8

= [Q × (P - VC)] - FC

Question 9

Contribution margin per unit

Answer 9

= (P - VC)

Question 10

Degree of operating leverage

Answer 10

= %Δ operating profit / %Δ sales
= Contribution/Operating profit

Question 11

Economies of scale

Answer 11

occur when increases in output decrease unit costs. Economies of scope occur adding divisions or product lines decreases unit costs

Question 12

A long (short) conversion cycle

Answer 12

indicates greater (less) need for external financing

Question 13

In assessing capital structure risks, the degree of financial leverage (DFL) is often used.

Answer 13

DFL = %Δ net income / %Δ operating income
= EBIT/EBT

Question 14

Unlevered returns are expressed as

Answer 14

return on assets (ROA) or return on invested capital (ROIC).

Question 15

Levered returns are expressed as

Answer 15

return on equity (ROE).