Company Analysis: Past and Present Flashcards
What is the primary purpose of a company research report?
To provide an analyst’s valuation and investment recommendations based on projected earnings, cash flows, and financial position.
What does initiating coverage of a company typically entail?
A thorough initial research report for external distribution, followed by less thorough subsequent reports.
List key items included in an initial company research report.
- Front matter
- Rationales for the recommendation
- Company description
- Industry overview and competitive positioning
- Financial analysis and model
- Valuation
- Environmental, social, and governance factors
- Key upside and downside risks
What additional elements are included in a subsequent company research report?
- Front matter
- Recommendation with rationales for changes
- Analysis of new information
- Changes to initial valuation
- Changes in risks since the last report
What does a company’s business model highlight?
Key drivers affecting its income statement and balance sheet.
What five key items describe a company’s operations in its business model?
- Products and services
- Customers
- Sales channels
- Pricing and payment terms
- Suppliers and key relationships
What types of information do analysts use to determine a company’s business model?
- Information from the company
- Publicly available third-party information
- Proprietary third-party information
- Proprietary primary research
What are revenue drivers, and how can they be analyzed?
Factors that influence revenue, analyzed through bottom-up or top-down approaches.
What is pricing power?
The extent to which a company can set its selling prices without negatively impacting sales.
True or False: In highly competitive markets, companies have high pricing power.
False
What characterizes less competitive markets?
- Greater product differentiation
- Few or no substitutes
- High barriers to entry
- High customer loyalty
- High switching costs
What indicates a company’s pricing power through profit margins?
When prices rise more than costs over time.
What are macro factors that affect revenue?
- Market size
- Company’s market share
Define operating costs.
Costs incurred by a company to generate current period revenue.
List the three ways to categorize operating costs.
- By relationship with output (fixed or variable)
- By nature
- By function
How is operating profit expressed in terms of fixed and variable costs?
operating profit = [Q × (P – VC)] – FC
What does DOL stand for and what does it measure?
Degree of Operating Leverage; it measures the sensitivity of operating profit to sales changes.
What are common metrics for operating profitability?
- Gross profit
- EBITDA
- EBIT
What is the formula for gross profit?
Gross profit = revenue – cost of sales
What is the cash conversion cycle?
A measure of how long it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
What is the significance of net working capital?
It indicates whether a company can finance its working capital needs from internal sources.
List the sources of capital for a company.
- Cash flows from operations
- Proceeds from debt and share issuances
- Proceeds from asset sales
What does evaluating a company’s capital investments involve?
Determining whether the company has earned at least the required rate of return over the long run.
What is the formula for Degree of Financial Leverage (DFL)?
DFL = %Δ net income / %Δ operating income
