Definitions Flashcards
Risk
Cash flows that are more uncertain and that are more likely to not materialize when you need income are riskier
what markets does the firm operate in (g, r, ROE)
g and r
what is the firm’s business model, how does the firm try to make money in these markets (g, r, ROE)
ROE
what is the firm’s strategy for securing sustained high profitability, what are the competitive advantages/disadvantages (g, r, ROE)
ROE and r and g
how successful is the firm with that strategy (g, r, ROE)
ROE and r and g
how operationally efficient is the firm (g, r, ROE)
ROE
Competitive advantages Supply
cost advantages (difficult to sustain)
Competitive advantages Demand
access to market demand that competitors cannot match. This is about customer captivity (easier to defend often)
Competitive advantages Economies of scale
Decreasing costs per unit as volumes decline (vulnerable to big players)
Best combination competitive advantages
Demand and Economies of scale
Operating assets
Assets that we believe are employed in the operations of the company
Conservative accounting
account for the project by expensing all market costs in the period that they are incurred (in cases where future benefits are either not easy to estimate or uncertain)
Financial liabilities
reflect external financing from external parties other than equity holders
Financial assets
Financial resources ‘parked on the balance sheet’ and that do not really contribute to operations at the moment
Operating liabilities
type of ‘internal funding’ due to the nature of business operations
Old plant trap
ROE is too high because straight-line depreciation is too conservative, leading to significant understatement of investment and overstatement of ROE with old plant
Matches or neutral accounting
Amount for the project by capitalizing marketing costs and then amortizing them in proportion to the benefits received
Aggressive accounting
Account for the project by capitalizing marketing costs and then expensing all of these costs in the first period in which no benefits are received from the project
Reasons high profitability
1) efficient use of operating assets 2) pricing power and cost advantages 3) leverage effects
RNOA (measure of)
profitability of operations
NOA turnover (measure of)
operating efficiency
common measures driving the margin-turnover trade-off
1) Industry-wide production technology that requires significant capital investment 2) Product differentiation vs cost leadership strategy 3) Vertical integration vs outsourcing strategy
plug usually items
cash, debt or equity
Terminal period
how long it takes the firm to reach a steady state in which growth has tapered down to the average growth of the economy and profitability has reverted to its long-run value (ROE = r)
systematic risk
cash flows are correlated with the market
Key to high P/E ratio
Growth in residual income
Low PEG ratio indications (2)
Market is underpricing future earnings growth and short-term growth rate is higher than long-term growth rate
