LM 5: Company Analysis: Past & Present Flashcards
What are the 3 parts to a company analysis?
- Company analysis: past and present
- industry and competitive analysis
- Company analysis: forecasting
What 8 factors should an analyst consider when initiating coverage of a company? FRCIFVER
- front matter
- recommendation
- company description
- industry overview & competitive positioning
- financial analysis & modeling
- valuation
- ESG considerations
- Risks
What 3 things should be covered in the front matter when initiating coverage of a company? IAL
- issuer name
- analyst recommendation
- legally required disclosures
What 2 things should be covered in the recommendation when initiating coverage of a company? AS
- analyst recommendation
- summary of key factors supporting recommendation
What 2 things should be covered in the company description when initiating coverage of a company? DE
- discussion of issuer business model
- explanatory charts & figures
What 4 things should be covered in the industry overview & competitive position when initiating coverage of a company? ICPE
- industry size, growth, profitability
- competitive analysis such as porter 5 forces
- PESTLE analysis of external industry influences
- Evaluation of company’s position and strategy in industry
What 4 things should be covered in the financial analysis & model when initiating coverage of a company? EEFH
- evaluation of factors driving revenues, cost, profitability, and cash flows
- evaluation of company sources and uses of capital
- forecasts of key drivers and a supporting discussion
- historical and forecasted financial statements
What 2 things should be covered in the valuation when initiating coverage of a company? VD
- valuation estimate and price target.
- discussion of key inputs and scenario/sensitivity analysis
What 3 things should be covered in the ESG Considerations when initiating coverage of a company? EOE
- evaluation of ESG indicators and risks
- ownership structure and management composition
- executive compensation
Whats 1 thing should be covered in the risks when initiating coverage of a company? E
- evaluation of material risks and discussion of their potential impact
What 5 factors should an analyst consider when following up coverage of a company after the initial coverage? FRAVR
- front matter
- recommendation
- analysis of new information
- valuation
- risks
What are the 5 elements of a company’s business model? PCSPS
- product or service (what does firm sell?)
- customer (who do they sell to?)
- sales channels (how do they acquire and deliver product?)
- price (payment terms and how much they charge?)
- suppliers and partners (who do they buy/rely upon?)
What are the 4 sources of information analysts can draw from to determine company business model? IPPP
- issuer sources
- public third party sources
- proprietary third party sources
- proprietary primary research
What are 2 examples of issuer sources? RE
- regulatory filings
- earnings call / investor presentation
What are 2 examples of public third party sources? EN
- economic indications
- news publications (general/ industry specific news publications)
What are 2 examples of proprietary third-party sources? RA
- reports prepared by equity or credit rating agency
- analysis from industry focused consultancies
What are 2 examples of proprietary primary research? SI
- surveys, studies commissioned by analyst
- industry experts
What are 3 ways to organize and classify operating costs, describe them? BNF
- behavior with output (fixed or variable)
- nature (what cost has been incurred eg. raw materials, rent, compensation)
- function (costs purpose eg. COGS, R&D, depreciation/amortization)
How does IFRS and US GAAP require issuer to group operating costs?
by either nature or function
What is the difference between depreciation and amortization?
depreciation is for tangible assets and amortization is for intangible assets
What happens with depreciation/ amortization on the statement of cash flows?
they get added back to net income when calculating CFO
Which cash flow activity statement does IFRS require you to report income taxes and interest payments?
income taxes: operating
interest payments: operating or financing
Which cash flow activity statement does US GAAP require you to report income taxes and interest payments?
income taxes: operating
interest payments: operating
What is the formula for operating profit?
operating profit = [ Q * (P - VC)] - FC
Q = units company sells
P = price per unit
VC = variable costs
FC = fixed costs
What is the formula for contribution margin derived from operating profit?
(P -VC)
P = price per unit
VC = variable costs
What is the degree of operating leverage (DOL) formula?
DOL = % change operating profit / % change in sales
What is gross margin formula?
gross profit / revenue
What is EBITDA Margin formula?
EBITDA / revenue
What is operating profit / EBIT margin formula?
Operating Profit (EBIT) / Revenue
What is economies of scale?
costs reductions that occur as production increases. measure with gross margin
gross margin = gross profit / net sales
What is economies of scope?
when company spreads its fixed costs over various product lines / business segments (eg. coke, coke zero)
What is total working capital formula?
total working capital = current assets - current liabilities
What is cash conversion cycle formula?
cash conversion cycle = DOH + DSO - DPO
DOH = days of inventory on hand
DSO = days of sales outstanding
DPO = payables outstanding
What is the relationship between working capital and cash conversion cycle?
the higher the working capital the higher/longer the cash conversion cycle
When does a company have pricing power?
when it is able to increase prices without negatively affecting its sales volume.
What is degree of financial leverage formula?
DFL = % change net income / % change operating income
What are the 2 formulas for degrees of total leverage?
DTL = degree of financial leverage * degree of operating leverage
DTL = % change in net income / % change in sales
DFL = % change in net income / % change in operating income
DOL = % change in operating income / % change in sales
What is ROE formula?
net income / average shareholders equity
What is the 2 formula ROE?
ROA * Leverage
ROA = net income/average total assets
Leverage = average total assets/ average shareholders equity
What is DuPont Analysis?
formula that breaks up a company’s ROE into multiple ratios to determine a company’s strengths and weaknesses.
What is ROE formula broken into 3 ratios?
ROE = (net income / revenue) net profit margin * (revenue / average total assets) total asset turnover * (average total assets / average shareholders equity) leverage
What is ROE formula broken into 5 ratios?
ROE = tax burden * interest burden * EBIT margin * total asset turnover * leverage
What is formula for tax burden vs interest burden?
Tax burden = net income / EBT
Interest burden = EBT / EBIT
What is EBIT margin and Total Asset turnover formula?
EBIT Margin = EBIT / Revenue
Total asset turnover = Revenue / average total assets
What is financial leverage formula?
average total assets / average shareholders equity
What is the first step in reviewing a company’s capital investment?
determine the major sources and uses of cash
