Ch 10 - Fundamental Analysis Flashcards

1
Q

Fundamental Analysis

A

Assess the “true” or “fundamental” value of an asset by analysing all of the factors that influence the future returns

Analysis of a company’s share value and potential for future profits and dividends, based on accounting and economic information

The study of the economic and financial factors affecting a company’s share price

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2
Q

The use of fundamental analysis to identify price inefficiencies relies on the existence of an…

A

Inefficient market

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3
Q

FA consists of two stages:

A

Modelling
-Construct a model of the company to estimate future cashflows and earnings

Valuation
-Use the output from the 1st stage to determine whether the company’s securities are over-valued or under-valued by the market

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4
Q

The key factors affecting the relative demand for individual shares are investors’ expectations for:

A

Future dividend payments and capital growth

Risks of the business

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5
Q

Factors affecting the relative market price of a share

A

Q Hates Connor’s Masturbation RIP

Quality of products
-and range

History
-compare to last years results for example

Competition
-determines market share

Management ability
-often key influence over success

Retained profits
-low payout ratio = finance future growth or management less confident over future
Input costs
-growth of these and how it affects profitability
Prospects for market growth
-is it in a developing sector or is it a small company

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6
Q

In order to form a view on these factors (affecting relative market price of a share), a fundamental analyst will investigate

A

BAD CLAP

Borrowing level
Accounting ratios and financial accounts
Dividend and earnings cover

Comparative figures for other similar companies
Liquidity level
Asset value growth
Profit variability and growth

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7
Q

Possible sources of information include

A

TV FAPS SECs and DD

Trade press
Visits to the company

Financial press and other commercial information prov
Accounts of company’s
Public statements by the company
Stockbrokers’ publications

Statutory information (from gov sources)
Exchange where the securities are listed 
Credit ratings 

Discussions with company management
Discussion with competitors

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8
Q

Interest cover

A

PBIT / Annual interest on debt

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9
Q

Capital cover

A

(Total assets – total liabilities - intangibles) / Balance sheet value of debt

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10
Q

Net asset value per share

A

(Total assets – total liabilities – intangibles) / number of issued ordinary shares

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11
Q

Dividend yield

A

annual dividend per share/ share price

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12
Q

Dividend cover

A

Earnings per share / dividends per share

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13
Q

Return on capital employed

A

PBIT / Share capital & reserves + long term debt

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14
Q

Return on equity

A

net profit / net assets

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15
Q

Current ratio

A

Current assets / current liabilities

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16
Q

Quick ratio

A

current assets – inventories / current liabilities

17
Q

Price Earnings

A

Share price / earnings per share

18
Q

Operating leverage

A

(sales – variable costs) / PBIT

19
Q

Financial leverage

A

interest payments / PBIT

20
Q

Capital leverage

A

debt/equity

21
Q

The estimates of future earnings or other relevant factors obtained from a fundamental analysis of a company can be used to calculate a value for the shares using methods such as:

A

Discounted dividend model

Comparison of PE ratios

Compare some fundamental factor (such as anticipated earnings)

22
Q

Why might the PER of a share be higher than that of another apparently similar share for a company in the same industry?

A

Shares are thought to be low risk– thus commands a higher share price

Dividends of the company are believed to have a higher growth rate – thus commands a higher price

Recent earnings have been depressed or exceptionally low for a particular one-off reason

Shares are over-priced

23
Q

Credit rating is a four-step process involving an assessment of:

A

Purpose

Payback (source of repayment/ability to repay)

  • cashflow
  • sale of assets
  • ability to refinance

Risks that could jeopardize repayment

  • character and ability to repay
  • macro and company-specific issue need to be considered

Structure
-terms and conditions of bond issue

24
Q

The fundamentals of the rating agencies’ approach to rating companies will focus on:

A

Fundamental risks of the company’s industry

Competitive position

Downside risk vs upside potential

Quality of profitability vs EPS growth

Cashflow generation vs book profitability

Forward looking analysis

Strategy, management track record and risk appetite

Capital structure and financial flexibility

25
Q

Financial tests assess:

A

Financial strength
Operating performance
Market profile
Qualitative factors

26
Q

4 stages of the Trade Cycle

A

Economy relatively buoyant
Start of a recession
Bottom of recession
Recovery