Intro To Fundamental Analysis

Question 1

Operational effectiveness

Answer 1

Company performing better than rivals in similar activities

Question 2

Competitive advantage

Answer 2

Company performing better than rivals by doing different activities/activities in different ways

Question 3

MD&A

Answer 3

Management discussion & analysis

Found at beginning of annual report

Supposed to be frank commentary on management outlook

Question 4

4 parts of evaluating management

Answer 4

1. Conference calls
2. MD&A
3. Ownership & insider sales
4. Past performance of management

Question 5

Corporate governance definition

Answer 5

Policies around relationships/responsibilities btwn management, board of directors, and stakeholders

Defined in company charter

Question 6

3 ways of evaluating corporate governance

Answer 6

1. Financial and information transparency — timeliness and quality of financial disclosures/operational happenings
2. Stakeholder rights — policies benefitting stakeholder/shareholder interests, takeover defenses, ownership voting rights to call meetings
3. Structure of board of directors — should be independent. Info on board of publicly traded companies available in DEF 14A proxy statement

Question 7

5 important industry factors

Answer 7

1. Customers — does one customer account for majority of sales? (Disclosed in 10-K)
2. Market share — “economic moat,” “economies of scale” (bigger market share = better position to absorb costs)
3. Industry growth
4. Competition — barriers to entry, pricing power
5. Regulation

Question 8

Balance sheet formula

Answer 8

Assets = financing ((liabilities (debt) + shareholder equity (ownership $ + retained earnings))

Question 9

What does the income statement show and when is it reported?

Answer 9

Reported quarterly and annually

Shows revenues, expenses and profit

Question 10

OCF

Answer 10

Operating cash flow

Cash from day-to-day operations

Question 11

CFI

Answer 11

Cash from investing

Cash used for investing in assets + proceeds from sale of other business, equipment or long term assets

Question 12

CFF

Answer 12

Cash from financing

Cash paid or received from issuing and borrowing of funds (dividends etc.)

Question 13

Cash flow statement & why it’s important

Answer 13

OCF, CFI, CFF

Important bc very hard to manipulate #’s

Question 14

10-K & 10-Q

Answer 14

SEC required annual report

“Annual report” is 10-K in fancier marketing format

10-Q is quarterly 10-K (3 of them annually). Not required to be audited

Question 15

Auditor’s report

Answer 15

CPA required to express wether company’s financial statements are reasonably accurate/provide adequate disclosure

Question 16

Important info in footnotes

Answer 16

Accounting methods — “cookie jar accounting,” etc.

Disclosure — legal proceedings, etc.

Question 17

What to look for in revenue?

Answer 17

Low expenses or high profits relative to revenue

Revenue that continues year over year

Question 18

COGS

Answer 18

“Cost of goods sold”

Costs of producing or purchasing goods and services sold by the business

Question 19

SG&A

Answer 19

“Selling, general and administrative expenses”

Costs involved in operating the business

Depreciation and amortization

Corporate expenses such as R&D

Question 20

Gross profit (“gross margin”) formula

Answer 20

Revenue - COGS

Question 21

Operating profit formula

Answer 21

Revenue - (COGS + SG&A)

Question 22

Company equity (“net assets,” “shareholder equity”) formula

Answer 22

Equity = total assets - total liabilities

Question 23

Current assets & current liabilities

Answer 23

Assets likely to be used up within 1 business cycle (usually 1 year)

Includes cash, inventories, and accounts receivables

Liabilities that must be paid within a year

Question 24

Inventory turnover formula

Answer 24

COGS / average inventory

Question 25

Receivables

Answer 25

Outstanding (uncollected bills)

Company’s collection period growing longer can signal trouble (Letting customer’s stretch their credit in order to recognize greater top-line sales)

Question 26

Non-current assets & non-current liabilities

Answer 26

Non-current liabilities — bank and
bond holder debt

Non-current assets —

Question 27

Quick ratio formula

Answer 27

(Current assets - inventories) / current liabilities

Question 28

Paid in capital definition

Answer 28

Amount shareholders paid for their shares when stock IPO’d (how much $ company received when it first flails its shares)

Question 29

Retained earnings definition

Answer 29

$ company chose reinvest instead of pay to shareholders

Question 30

Accrual accounting definition

Answer 30

Recording revenues and expenses when transaction occurs rather than when cash is exchanged

Used on income statement, not cash flow statement

Question 31

Net income significantly > OCF

Answer 31

Company may be speeding or slowing its booking of income or costs

Question 32

What to look for in CFI

Answer 32

Re-investing Capital by at least the rate of depreciation

Question 33

FCF

Answer 33

Free cash flow

net income + amortization/depreciation - changes in working capital - capital expenditures = FCF

Excess cash produced by company, cash that can be returned to shareholders or invested in new growth without hurting existing operations

Question 34

Premise of discounted cash flow analysis formula

Answer 34

Current value of company = present value of future cash flows attributable to shareholders

Question 35

Quick ratio >1

Answer 35

> 1 - company has enough cash and liquid assets to cover short term debt obligations

Question 36

Inventory growth > sales growth

Answer 36

Almost always sign of deteriorating fundamentals