chapter 3 - key concepts (financial statements, cash flow and taxes) Flashcards
Review the WeWork Case
* What is the We Company’s business model?
* Why does We need to raise capital?
* How does We illustrate how the IPO process works?
ask the professor
Hedge funds and derivatives (reviewed)
Hedge funds often use derivatives to increase risk.
Hedge funds: investments for sophisticated individuals, speculate to make money.
Lots of requirements: certain amount of net wealth (investments can be risky)
to speculate is to use derivatives to bet on the direction of future stock prices, interest rates, exchange rates and commodity prices
What are Quarterly Earnings Reports? Why do investors care about them so
much?
Most stocks report earnings four times a year (three month time period)
Crucial report!!!!
- Results can move stock prices by 3-15%+ (because of guidance)
- Netflix recently reported earnings, missed performance and stock fell 20% in one day! (lost 20% of value) (sharp slowdown of subscriber growth)
Why care: Investors and analysis pay close attention to the company’s cash, profits, and investment decisions
What are the four parts of an annual report?
Balance sheet:
Provides a snapshot of a firm’s financial position at one point in time. Usually update within the last week or month.
Income statement:
Summarizes a firm’s revenue and expenses over a given period
Statement of cash flows
Summarizes the impact of a firm’s activities on cash flows. Positive or negative cash flow.
Statement of stockholders’ equity:
Shows how much of the firm’s earnings were retained. Firms can retain earnings for future investment or pay out as dividends
- What to do with profit? → dividends (cash)? Or reinvesting into company
what is an annual report
- Corporations are required to release information to investors about the company’s performance
- Most important report corporation release
- Information can be used to forecast future financial performance, such as dividends payouts, credit ratings, and stock price valuation
What is the most important report that a corporation issues?
the annual report because information can be used to forecast future financial performance, such as dividends payouts, credit ratings, and stock price valuation
Stockholder’s Equity
to be clear, shareholder’s equity and stockholder’s equity mean the same thing
Stockholder’s equity = price paid for shares (back at IPO) + retained earnings
COMMON STOCK + RETAINED EARNINGS
Income
How much are we making?
Net income = revenue - expense
Sales/revenues, Cost of goods sold, expenses, depreciation and amortization, EBIT (earnings before interest and taxes)
Operating income
income from operations before taxes and interest, knowns as EBIT - earnings before interest and taxes
EBIT = sales revenues - operating costs
Earnings per share
Price to Earnings Ratio (P/E Ratio)
Stock price / Earnings
Ratio of the price per share to earnings per share
How much will investors pay for $1 of current earnings?
Firm wants a BIG number!
book value per share
Market to book ratio
- Market price/book value per share
- Firm wants a BIG number
dividends per share
is the sum of declared dividends issued by a company for every ordinary share outstanding
