Equity lvl 2 - Reading 33 (Industry and Co. Analysis) Flashcards
define “growth relative to GDP growth” approach
using GDP and company sales to model growth. GDP x (1+ comp. rev growth”
define “market growth and market share” approach
estimate of industry sales (mkt growth) and company revenue as % of industry sales (market share). company revenue = mkt grwth x mkt share
will company have economies of scale when they exhibit higher op. margins?
yes, because lower average cost
will companies have economies of scale when they are larger or smaller?
larger because their margins tend to be bigger and this leads to economies of scale
economies of scale - what to look for in common size income stmt?
COGS lower as proportion of sales and lower SG&A as proportion of sales
Define gross interest expense
“level of debt and market interest rates”
Define net debt
“gross debt - cash, cash equiv., short-term securities”
Define net interest expense
“gross interest expense - interest income on cash and short-term debt securities”
Define statutory tax rate
”% tax charged in country where firm is domiciled”
Define effective tax rate
“income tax expense as % of pretax income on income statement”
Define cash tax rate
“cash taxes paid as % of pretax income”
Formula: income tax expense (lvl 1 reminder)
cash tax due + changes in DTL - change in DTA
What is effect on effective tax rate if company has higher earning growth in a HIGH tax environment?
when earning growth is higher in high tax country, effective rate rate will increase
Difference btwn capital expenditures for maintenance vs. capital expenditures for growth?
CAPEX for Maint. should use historical depreciation + inflation rate because replacement cost will increase with inflation
Formula: ROIC (return on invested capital)
NOPLAT / (Op. assets - Op liab.)
(Invested capital = Op assets - op liab). NOPLAT = net op profit adjusted for taxes
Define ROIC (return on invested capital)
return to both equity and debt and is preferable to ROE in some cases because allows comparisons across firms with diff capital structures
Formula for return on capital employed
Pretax Op earnings/ (op assets - op liab)
why would you use return on capital employed vs. ROIC
to compare companies that have different tax rates
Porter: threat of substitute high, switching cost low = more or less pricing power?
Less pricing power
Porter: When intensity of industry rivalry is high = more or less pricing power?
less pricing power. Usually with less concentration, fixed costs and exit barriers high.
Porter: when exit barriers are high, more or less pricing power?
less pricing power
Porter: When bargaining power of suppliers is high, earnings growth is lower or higher?
usually lower because there are not many suppliers
Porter: When barg. power of customer is higher, switching costs low = more or less pricing power for comps?
less pricing power, especially when there is a small # of customers making up large proportion of company sales
Porter: When threat of new entrants is low = more or less pricing power for companies?
more pricing power and potentially better earning growth
Effects of increasing product’s price depend on what?
product’s elasticity of demand. (when elastic demand, price increase will reduce total sales rev)
A firm that increases costs before other companies will face more or less decrease to their sales rev?
sales rev will decrease more than if they waiting for other firms to do it first
Define normalized earnings
“expected earnings when the current (temp) effects of events or cyclicality are no longer affecting earnings”
Define inflection points
“those instances when the future will not be like the past, due to change in chomp/industry competitive environ. or overall economy”
Define sales-based pro forma financial statement
“end result of all assumptions and estimates developed using multiple techniques” (like estimating COGS, SG&A, revenue growth, estimating financing costs, etc)
