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AFM 212 > Module 2 > Flashcards

Module 2 Flashcards

1
Q

what is regulation S-K

A
  • requires a description of the general development of the business of the registrant during the past 5 years or however long the business has been running for (if its less than 5 years)
  • requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing on the registrant’s dominant segment or each reportable segment about which financial information is presented in its financial statements
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2
Q

what is the item 1

A
  • a descriptions section in the 10-k
  • General description of the company’s business and the markets in which the company competes
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3
Q

how does one understand the business

A
  • look at their s-1
  • decipher it into plain english
  • if a company is using fancy language instead of plain english its fishy
  • determine how the company makes money
  • identify the type of economic frictions the company addresses in the economic system
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4
Q

what is airline’s businesses (where do they get most of their value from)

A

since there is high barrier to entry from fixed costs, they get most of profit/value from their loyalty programs

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5
Q

what are the different components of a business model

A
  • business description
  • competition
  • product and/or service
  • customers
  • supplier
  • ownership
  • governance and management
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6
Q

what does business description include

A
  • industry (what is it like)
  • life cycle stage (where they are in the life cycle)
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7
Q

what does customers include

A
  • major customers (who are they, is risky if its only 1 type)
  • customer concentration
  • marketing strategy distribution process
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7
Q

what does competition include

A
  • major competitors
  • market share (what is it? are they market leaders or followers)
  • competitive advantage
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7
Q

what does ownership include

A
  • owners
  • owner structure
  • owners involvement
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8
Q

what does supplier include

A
  • key suppliers (how many are there)
  • credit terms (what are they)
  • bargaining power
  • alternative source of supplier
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8
Q

what does product and/or service include

A
  • product profile
  • sales driver (the main driver of sales)
  • life cycle
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9
Q

what does governance and management include

A
  • board of directors
  • management and directors’ background and experience
  • compensation
  • successor plan
  • here you determine how much of the firm is owned by institutional investors?
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10
Q

what does it mean if you get -CCC

A
  • how many days the company can invest the cash they received from customers for before they need to pay back the suppliers
  • They can make investment income
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11
Q

what is time-series comparison

A
  • horizontal analysis of ratios
  • comparing ratios with levels in prior periods
  • normal vs abnormal: identifying changes in performance and detecting the underlying cause
  • triangulate the ratios with structural changes
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12
Q

what is cross sectional comparison

A
  • comparing a firm’s ratios with competitors
  • also called comparative analysis (comps)
  • triangulate the ratios with corporate strategy
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13
Q

what does it mean that ratios tend to mean-revert

A

generally for many ratios in large sample firms:
- if they are unusually high, they will tend to fall to the average
- if they are unusually low, they will tend to rise to the average
- the speed and completeness depend on the ratio and the specific firm

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14
Q

what is the purpose of ratio comparison

A
  • to forecast future
  • a ratio on its own has no significance
  • ratios tend to mean-revent
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15
Q

what is the formula for net a/r

A

a/r - afda

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16
Q

what is net working capital formula

A

current assets - current liabilities

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16
Q

what is the formula for net pp&E

A

pp&e - accumulated depreciation

17
Q

what is used as a common denominator for common size I/S

A

total revenue

17
Q

what is the analysis of NWC

A
  • Want it to be higher because it means that company has more to pay off current liabilities
  • required to conduct business depends on the company’s operating cycle
18
Q

what is the common size balance sheet used to compare

A
  • a company across two or more years
  • Two or more companies (adjusts for size and currency differences)
  • A company to industry or other benchmark
18
Q

what is Operating cycle/cash cycle/cash conversion cycle (CCC)

A

the time between paying cash for goods and receiving cash from customers

19
Q

what is the formula for CCC

A

Average days sales outstanding (DSO) + average days inventory outstanding (DIO) - average days payable outstanding (DPO)

19
Q

what is the gross profit margin formula

A

gross profit / sales

19
Q

what is common size balance sheet

A
  • vertical analysis/right sizing
  • Expresses the balance sheet in % terms
  • Every line item on the balance sheet is divided by total assets
19
Q

what is the process of the operating cycle

A
  • Cash or A/P is used to purchase inventory
  • Inventory is sold on cash or credit
  • When A/R is collected as cash, some of it is used to pay back any A/P, the rest is kept as cash for the next cycle
  • You want to shorten operating cycle to maximize profit and cash flow
19
Q

how do you calculate DSO

A

of days (365) / (average A/R) / total credit sales)

19
Q

how do you calculate DIO

A

of days (365) / (average inventory) / COGS)

19
Q

how do you calculate DPO

A

of days (365) / (average A/P) / COGS)

20
Q

what is used as a common denominator for common size B/S

A

total assets

20
Q

what is the analysis of gpm

A
  • Influenced by the selling price and the cogs
  • Want it to be high and increasing
  • Low and declining = more competition or reduction in the desirability of the good or increasing inventory costs
20
Q

what are discontinued operations

A
  • represent a strategic shift that has or will have a major effect on the company’s financial results
  • will be treated as nonoperating
20
Q

what are the two components discontinued operations affect on the income statement

A
  • Net income / loss from the business prior to sale (Only for the portion of the current year prior to sale)
  • Any gain or loss on the discontinued operation
21
Q

what is the operating expense margin formula

A

operating expense / sales

22
Q

what is the analysis of oem

A
  • % of operating expenses over sales over time
  • Compared with peer companies
23
Q

what is common size income statement

A
  • vertical analysis/right sizing
  • Expresses the income statement in % terms
  • Every line item on the income statement is divided by total revenue
24
Q

what is common size income statement used to compare

A
  • a company across two or more years (time series analysis)
  • Two or more companies (adjusts for size and currency differences) (cross-sectional analysis)
  • A company to industry or other benchmark
25
Q

what are the questions you ask when analyzing cash flows

A
  • Is the company generating cash from operating activities
  • Is the operating cash flow sustainable
  • Is the company investing its cash to grow its infrastructure (PP&E) or to enter new markets by acquiring other companies
  • Is the company using its excess cash to build liquidity (purchase of marketable securities)
  • Is the company paying down debt or paying dividends?
  • Is the company repurchasing stock
26
Q

what are the advantages of common size (vertical statements)

A
  • allows meaningful comparisons overtime while “controlling” for changes in firm size (measured either as sales or total assets)
  • allows meaningful comparisons for firms using different currencies
  • allows meaningful comparisons between firms
27
Q

what is a caution you should take about common size (vertical statements)

A
  • changes in expenses may not be directly related to changes in sales
  • need to dig deeper to understand reasons underlying changes
  • ex. depreciation, or SG&A (maybe marketing is related)
28
Q

what is horizontal financial statements

A
  • calculating the difference as a percentage of the base year
  • focus on growth in each item over time
29
Q

when would you use the ending balance

A
  • with long time series, it doesn’t matter much if used consistently
  • one more year of data
  • easier to calculate
  • more timely
29
Q

what is a caution to take with horizontal financial statements

A
  • small (immaterial) accounts, especially on the balance sheet can often be associated with huge % changes
  • but it doesn’t mean they are important
29
Q

which balance options are mostly used

A
  • use only ending balance
  • using both beginning and ending balance (average)
29
Q

what are the different balance options to use when calculating ratios from the balance sheet

A
  • use only beginning balance
  • use only ending balance
  • using both beginning and ending balance (average)
29
Q

when would you use the average balance

A
  • if the purpose is to evaluate the performance in a period of time (ex. year or quarter)
  • would use the I/S accounts in that period
  • use time-weighted B/S (the average)
29
Q

what are the caveats of ratio analysis

A
  • no “correct” way to compute many ratios
  • ratios don’t provide answers, just tell you where to look for them
  • managers know that investors use ratios

AFM 212 (7 decks)

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