Chapter 10:Fundamental Analysis Flashcards
List seven general factors that should be considered when analysing a particular company and its share
Management ability Retained profits Competition History Input costs Prospects for making growth Quality products
What is fundamental analysis and what are the two step involved in the process.
Fundamental analysis is the study of financial and economic factor affecting the firm’s share price.
It can be performed on a market level or on the industry level.
(1) It involves modelling the firms allowing for future cash flows as well as earnings.
(2) The result from the first step can be used to determine whether the share is under or overvalued
List seven quantitative factors that should be considered when analysing a company and its share
Financial accounts and accounting ratios
Dividend and earnings cover
Profit variability and growth
Level of borrowing
level of liquidity
growth in asset values
Comparative figures for other similar companies
List three ways of determining whether a share appears to be cheap or dear
omparing value for share obtained using discounted dividend model with actual share price
Comparing value for share obtained using price earnings ratios with actual share price
Compared some fundamental factor (such as anticipated earnings) with market consensus estimate. If analyst’s estimate better/worse than market’s then share might be cheap/dear
Cannons of lending
Character and ability of the borrower
Purpose of loan
Amount that is being borrowed
borrower’s ability to repay
Security offered to the lender
Trade off between risk vs. reward
6 reasons for seeking finance
Organic growth acquisition investment in associated company capital expenditure financing dividend financing share buy back
List 3 credit rating issues to consider in relation to the repayment of a loan
Future cashflow and profit profile
Possible sales of assets and or business
Refinancing ie raising further funds in future
6 credit rating factors to consider under the heading risks
Industry analysis and competitive trends
regulatory environment
sovereign macroeconomic analysis
Qualitative analysis, eg of management, goods and services
Company’s financial performance - both recent past and projected future
company’s market position - relative to its competitors
List four credit rating factors to consider relating to the structure of the bond
Structure bond i.e. term, coupon rate, fixed or variable
Status in terms of ranking wit regards to other debt
safeguards, such as security, guarantees and covenants
(collateral quality and the ability to which collateral can change)
Price and yield
List five factors that can be used to assess the company’s financial strength
Operating leverage Financial leverage asset leverage capital structure liquidity
Two factors that must be considered when assessing the operating performance of a company
Four factors that must be assessed in relation to company’s market profile
Operating performance
+Sources of and trends in profitability
+revenue composition
Market profile
+Market risk - risk relating to market sector as whole
+Competitive market position within sector
+Spread of risk across different markets
+event risk, exposure to specific events e.g. hurricane for insurance company
Descrive the price earnings ratios (PERs) typically vary over the course of the economic cycle for defensive and cyclical companies
If economy moderately buoyant and profits are fairly stable, defensive and cyclical companies similarly rated
As economy moves in recession, PERs for cyclical companies fall, while those of defensive companies remain stable or rise slightly
At the bottom of cycle, PERs of cyclical companies will probably have risen from their low point as earnings have fallen, but defensive stocks still be more highly rated (ie higher [PERs)
As economy starts to recover, PERs of cyclical companies will rise as price increase in anticipation of future earnings growth. PERs of defensive companies may be below those cyclicals
As growth continues, earnings of cyclical companies catch up with the share price and PERs fall back
