Module 2 Flashcards
what is regulation S-K
- 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
what is the item 1
- a descriptions section in the 10-k
- General description of the company’s business and the markets in which the company competes
how does one understand the business
- 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
what is airline’s businesses (where do they get most of their value from)
since there is high barrier to entry from fixed costs, they get most of profit/value from their loyalty programs
what are the different components of a business model
- business description
- competition
- product and/or service
- customers
- supplier
- ownership
- governance and management
what does business description include
- industry (what is it like)
- life cycle stage (where they are in the life cycle)
what does customers include
- major customers (who are they, is risky if its only 1 type)
- customer concentration
- marketing strategy distribution process
what does competition include
- major competitors
- market share (what is it? are they market leaders or followers)
- competitive advantage
what does ownership include
- owners
- owner structure
- owners involvement
what does supplier include
- key suppliers (how many are there)
- credit terms (what are they)
- bargaining power
- alternative source of supplier
what does product and/or service include
- product profile
- sales driver (the main driver of sales)
- life cycle
what does governance and management include
- 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?
what does it mean if you get -CCC
- 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
what is time-series comparison
- 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
what is cross sectional comparison
- comparing a firm’s ratios with competitors
- also called comparative analysis (comps)
- triangulate the ratios with corporate strategy
what does it mean that ratios tend to mean-revert
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
what is the purpose of ratio comparison
- to forecast future
- a ratio on its own has no significance
- ratios tend to mean-revent
what is the formula for net a/r
a/r - afda
what is net working capital formula
current assets - current liabilities
what is the formula for net pp&E
pp&e - accumulated depreciation
what is used as a common denominator for common size I/S
total revenue
what is the analysis of NWC
- 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
what is the common size balance sheet used to compare
- a company across two or more years
- Two or more companies (adjusts for size and currency differences)
- A company to industry or other benchmark
what is Operating cycle/cash cycle/cash conversion cycle (CCC)
the time between paying cash for goods and receiving cash from customers
what is the formula for CCC
Average days sales outstanding (DSO) + average days inventory outstanding (DIO) - average days payable outstanding (DPO)
what is the gross profit margin formula
gross profit / sales
what is common size balance sheet
- vertical analysis/right sizing
- Expresses the balance sheet in % terms
- Every line item on the balance sheet is divided by total assets
what is the process of the operating cycle
- 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
how do you calculate DSO
of days (365) / (average A/R) / total credit sales)
how do you calculate DIO
of days (365) / (average inventory) / COGS)
how do you calculate DPO
of days (365) / (average A/P) / COGS)
what is used as a common denominator for common size B/S
total assets
what is the analysis of gpm
- 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
what are discontinued operations
- represent a strategic shift that has or will have a major effect on the company’s financial results
- will be treated as nonoperating
what are the two components discontinued operations affect on the income statement
- 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
what is the operating expense margin formula
operating expense / sales
what is the analysis of oem
- % of operating expenses over sales over time
- Compared with peer companies
what is common size income statement
- vertical analysis/right sizing
- Expresses the income statement in % terms
- Every line item on the income statement is divided by total revenue
what is common size income statement used to compare
- 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
what are the questions you ask when analyzing cash flows
- 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
what are the advantages of common size (vertical statements)
- 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
what is a caution you should take about common size (vertical statements)
- 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)
what is horizontal financial statements
- calculating the difference as a percentage of the base year
- focus on growth in each item over time
when would you use the ending balance
- with long time series, it doesn’t matter much if used consistently
- one more year of data
- easier to calculate
- more timely
what is a caution to take with horizontal financial statements
- small (immaterial) accounts, especially on the balance sheet can often be associated with huge % changes
- but it doesn’t mean they are important
which balance options are mostly used
- use only ending balance
- using both beginning and ending balance (average)
what are the different balance options to use when calculating ratios from the balance sheet
- use only beginning balance
- use only ending balance
- using both beginning and ending balance (average)
when would you use the average balance
- 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)
what are the caveats of ratio analysis
- 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
