Intro To Fundamental Analysis Flashcards
Operational effectiveness
Company performing better than rivals in similar activities
Competitive advantage
Company performing better than rivals by doing different activities/activities in different ways
MD&A
Management discussion & analysis
Found at beginning of annual report
Supposed to be frank commentary on management outlook
4 parts of evaluating management
- Conference calls
- MD&A
- Ownership & insider sales
- Past performance of management
Corporate governance definition
Policies around relationships/responsibilities btwn management, board of directors, and stakeholders
Defined in company charter
3 ways of evaluating corporate governance
- Financial and information transparency — timeliness and quality of financial disclosures/operational happenings
- Stakeholder rights — policies benefitting stakeholder/shareholder interests, takeover defenses, ownership voting rights to call meetings
- Structure of board of directors — should be independent. Info on board of publicly traded companies available in DEF 14A proxy statement
5 important industry factors
- Customers — does one customer account for majority of sales? (Disclosed in 10-K)
- Market share — “economic moat,” “economies of scale” (bigger market share = better position to absorb costs)
- Industry growth
- Competition — barriers to entry, pricing power
- Regulation
Balance sheet formula
Assets = financing ((liabilities (debt) + shareholder equity (ownership $ + retained earnings))
What does the income statement show and when is it reported?
Reported quarterly and annually
Shows revenues, expenses and profit
OCF
Operating cash flow
Cash from day-to-day operations
CFI
Cash from investing
Cash used for investing in assets + proceeds from sale of other business, equipment or long term assets
CFF
Cash from financing
Cash paid or received from issuing and borrowing of funds (dividends etc.)
Cash flow statement & why it’s important
OCF, CFI, CFF
Important bc very hard to manipulate #’s
10-K & 10-Q
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
Auditor’s report
CPA required to express wether company’s financial statements are reasonably accurate/provide adequate disclosure
Important info in footnotes
Accounting methods — “cookie jar accounting,” etc.
Disclosure — legal proceedings, etc.
What to look for in revenue?
Low expenses or high profits relative to revenue
Revenue that continues year over year
COGS
“Cost of goods sold”
Costs of producing or purchasing goods and services sold by the business
SG&A
“Selling, general and administrative expenses”
Costs involved in operating the business
Depreciation and amortization
Corporate expenses such as R&D
Gross profit (“gross margin”) formula
Revenue - COGS
Operating profit formula
Revenue - (COGS + SG&A)
Company equity (“net assets,” “shareholder equity”) formula
Equity = total assets - total liabilities
Current assets & current liabilities
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
Inventory turnover formula
COGS / average inventory
Receivables
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)
Non-current assets & non-current liabilities
Non-current liabilities — bank and
bond holder debt
Non-current assets —
Quick ratio formula
(Current assets - inventories) / current liabilities
Paid in capital definition
Amount shareholders paid for their shares when stock IPO’d (how much $ company received when it first flails its shares)
Retained earnings definition
$ company chose reinvest instead of pay to shareholders
Accrual accounting definition
Recording revenues and expenses when transaction occurs rather than when cash is exchanged
Used on income statement, not cash flow statement
Net income significantly > OCF
Company may be speeding or slowing its booking of income or costs
What to look for in CFI
Re-investing Capital by at least the rate of depreciation
FCF
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
Premise of discounted cash flow analysis formula
Current value of company = present value of future cash flows attributable to shareholders
Quick ratio >1
> 1 - company has enough cash and liquid assets to cover short term debt obligations
Inventory growth > sales growth
Almost always sign of deteriorating fundamentals
