cumulative Flashcards
What are the Porter’s 5 Forces?
- Barrier to Entry
- Existing Competition
- Entry & Exist
- Threat of Substitute Products
- Bargaining Power of Buyers
- Bargaining Power of Suppliers
Describe the Business Cycle
- Expansion
- Peak
- Recession
- Depression
- Trough
- Recovery
Describe the Life Cycle Stages
- Introduction
- Growth
- Maturity
- Decline
What are the different External Factors that affect Industries?
- Economic Environment (recession, interest rate, taxes)
- International (political instability, economic & labour conditions, gov’t regulations)
- Political Environment (regulations, pres. elec., trade agreement, policies)
- Social Environment (cultural, ethic/issues)
- Technology (new process & product)
Categorize the SWOT Analysis into External & Internal + Positive & Negative Factors
Internal: Strengths & Weaknesses
External: Opportunities & Threats
Positive: Opportunities & Strengths
Negative: Threats & Weaknesses
How would you analyze Competitive Advantage?
- Does the company actually have a competitive advantage → what factors explain it?
- Is it sustainable?
- If the company has no competitive advantage → does management have a plan to develop a sustainable competitive advantage to be implemented in an acceptable period of time & w/ a reasonable amount of investment?
How to achieve Competitive Advantage?
- Barriers to entry (patents & copyrights, regulatory & licensing, scarce resources - higher prices)
- Product/Service differentiation (tech innovation & product design, marketing & customer experience)
- Cost leader (low-cost raw material, manufacturing/service/scale efficiencies, bargaining power w/ supplier)
What is Common-Size Analysis? What are its advantages?
Definition: Vertical Statement (all line items expressed as a % of net revenue/total assets)
Advantages: allows for meaningful comparisons
- over time
- between firms
What are Percentage Change Statements?
Horizontal statements (amounts expressed as a % of a base year) w/ focus on growth in each line item over time
Caution: small (immaterial) accounts may hold huge change in %, but it doesn’t necessarily mean they are important
What does the Quality of Forecasts depend on?
- Quality of prior analysis (understanding business & thorough examination + adjustments)
- Realistic & achievable assumptions (supporting evidence)
What is the order to Forecast f/s?
- Income Statement
- Balance Sheet
- Statement of Cash Flow
Explain ROE
ROE = Net Income / Avg. Shareholders’ Equity
Measures return from perspective of company’s stockholders
*must use value attributable to parent company (do not consider non-controlling interest)
Explain ROCE
Return on Common Equity = (Net Income - Preferred Dividends)/(Avg. Stockholders’ Equity - Avg. Preferred Equity)
What are the 2 methods to measure ROE Drivers?
- DuPont Analysis (disaggregates ROE into components of profitability, productivity & leverage)
- Operating Focus (distinguishes b/w operating & non-operating activities)
Describe the DuPont Disaggregation of ROE
ROE = Net Income / Avg. Shareholders’ Equity = (Net Income / Avg. Total Assets) x (Avg. Total Assets / Avg. Shareholders’ Equity)
ROE = ROA (PM x AT) = FL
ROE is higher w/ more more debt & less equity for given level of assets (higher risk)
Reflects a blend of the return on a company’s operating assets & its non-operating return
Explain ROA
ROA = Net Income / Avg. Total Assets
Measures return from perspective of entire company (enterprise value)
Explain PM
Profit Margin = Net Income / Sales
What the company earns on each sales dollar
Explain AT
Asset Turnover = Sale / Avg. Total Sales
Sales generated from each dollar invested in assets
Describe FL
FL = Avg. Total Assets / Avg. Shareholders’ Equity
Measures relative use of debt vs equity to finance company assets
Explain PPE Turnover
PPE Turnover = Sales / Avg. PPE
Describe the Operating Focus on ROE Analysis
Focuses on the operating activities (assets) to generate returns
Compares RNOA to ROE on a relative basis to determine if Profit is retained mostly w/ operating or non-operating activities
RNOA = NOPAT / Avg. NOA
Explain NOA
Net Operating Assets = Operating Assets - Operating Liablities
Components of Operating Assets
- A/R
- Inv’t
- Prepaid expenses/supplies
- PPE & ROU
- Intangibles & goodwill
- DTA
No Cash or Equity Method Investments
Components of Operating Liabilities
- A/P
- Accrued Expenses
- Deferred revenue
- Income taxes payable
- DTA
No Debt
Explain NOPAT
Net Operating Profit After Tax = NOPBT - Tax on Operating Profit
Explain NOPBT
Net Operating Profit Before Tax = EBIT (Sales - Operating Expenses)
Explain Tax on Operating Profit
Tax on Operating Profit = Tax Expense + (Pretax net non-operating expenses x Statutory tax rate)
The second component is a tax shield
What is Credit Analysis & its purpose?
Definition: to evaluate the ability & willingness of a borrower to meet financial obligations
Purpose: to determine (quantify) the likelihood that a borrower will repay their debt on time & in full (potential credit loss)
What is Credit Risk?
Risk that a borrower will fail to meet financial obligations as come due, leading to a loss for lenders/investors
Explain Expected Credit Loss
Expected Credit Loss = Chance of Default x Loss Given Default
Chance of Default: debtor’s ability to repay debt
Loss Given Default: size of loss if debtor defaults
Explain Distance to Default (DD)
DD = (Market Value of Firm’s Asset - Default Point) / Volatility of firm’s asset value
What are some credit terms used by lenders?
- Credit limits (max a creditor will allow a customer to owe at any point in time)
- Collateral (property pledged by borrower to guarantee repayment, most often real estate)
- Repayment terms (term of loan - longer = risker)
- Covenants
Describe Covenants
Loan terms & conditions designed to limit the loss given default
3 common types of covenants
- Positive/Affirmative: Require the borrower to take certain actions (submitting FS to lender)
- Negative/Restrictive: Restrict the borrower from taking certain actions (prevent mergers or other major investments)
- Financial: Require the borrower to maintain specific financial conditions (certain ratios & minimum equity)
Explain the Z-Score Interpretation
> 3.00: company is healthy
2.99 - 1.8: grey area > some risk
< 1.8: financial distress
95% accuracy in Year 1
72% accuracy in Year 2
When is revenue for gift card recognized?
Gift card revenue is recognized when something is purchased using that gift card
What are the 3 Inventory Costing Methods?
- First-In, First-Out (FIFO) - transfer costs from inventory in the order initially recorded
- Last-In, First-Out (LIFO) - transfers the most recent inventory costs from BS to COGS
- Average Cost - Average cost to purchase or manufacture inventory available for sale during period & applies average to determine COGS & ending inv’t
Why is LIFO prohibited under IFRS?
- Lack of representational faithfulness
- Distortion of financial results
LIFO can lead to lower reporting earnings than real financial performance, esp. during period of inflation - Inconsistent w/ economic reality
- Non-comparability
Describe adjusting LIFO to FIFO Inventory
FIFO Inventory = LIFO Inventory + LIFO Reserve
Describe adjusting LIFO to FIFO COGS
FIFO COGS = LIFO COGS - Increase in LIFO Reserve (or + Decrease)
Describe the Cash Conversion Cycle
CCC = DIO + DSO - DPO
DIO = 365 x (Avg. Inv’t / COGS)
DSO = 365 x (Avg. A/R / Sales)
DPO = 365 x (Avg. A/P / COGS)
What are the depreciation methods on Land, Building, & Machinery?
Land → Not depreciable
Building → SL
Machinery → Accelerating
