Unit 15 - Industries and Companies Flashcards
This is the study of industries and companies to identify the best places to invest. It is the process of examining the economy to identify industries that will do well in the near future.
Fundamental analysis
Fundamental analysis is also called
Top-down analysis
This industry is highly sensitive to business cycles and inflation trends. It produces durable goods, such as heavy machinery, and raw materials, such as steel and automobiles. During recessions, the demand for such products declines as manufacturers postpone investments in new capital good and consumers postpone purchases of these good.
Cyclical Industries
What are some examples of cyclical industries?
- Steel
- Autos
- Heavy equipment
- Capital good (washers and dryers)
This type of industry is least affected by normal business cycles. They produce nondurable consumer goods (sometimes called consumables), such as food, pharmaceuticals and tobacco. It remains fairly steady throughout the business cycle. During recessions and bear markets, stock in these industries generally decline less than stock in other industries, but during expansions and bull markets, these industries may advance less. They tend to involve less risk and consequently, lower investment returns.
Defensive Industries
What are some examples of defensive industries?
- Food
- Utilities
- Clothing
- Drugs
- Tobacco
- Liquor
If the company makes a product that is used once and consumer in the process, it is probably
Defensive
This type of industry tends to turn down as the economy heats up and to rise when the economy turns down. They are producers of a product that people buy when they are scared and looking for safety. People tend to flock to gold when the economy is weak and move away from gold as the economy improves and investors move into investments with better return potential.
Countercyclical
What are two examples of countercyclical industries?
- Gold mining
2. Refinement
This industry is one that seems to be disconnected from the business cycle, doing well regardless of the economy. This may apply to an individual stock, as well as to a specific industry.
Growth industry
This is normally applied to a specific economy, but it could apply to an industry as a whole. It can be anything from a hostile takeover to a cultural shift that moves the consumer away from the product. It may not be a positive condition.
Special situation
Smartphones and apps are considered a
Growth industry
Phone booths and street maps are considered a
Special situation
These tend to do well in expansions and poorly in contractions.
Cyclical Industries
These tend to be less impacted by the business cycle, maintaining sales throughout the cycle. They do not drop as much as cyclical industries do in poor economies and they do not grow as fast.
Defensive Industries
These industries do better when the economy is weak and lose value when the economy strengthens.
Countercyclical Industries
These industries do not care about the economy.
Growth Industries
These are situational; some specific circumstance is affecting them.
Special Situations
This provides fundamental analysts the data they need to understand the financial strengths and weaknesses of a company.
A corporations financial reports
When are financial reports released?
Quarterly and annual basis
This provides a snapshot of a company’s financial position at a specific time. It identifies the value of the company’s assets (what it owns) and its liabilities (what it owes).
Balance sheet
The difference between the value of a company’s assets and its liabilities is the corporations
Equity or net worth
This cannot tell analysts whether a company is improving or deteriorating. It does not measure the profitability of a business.
Balance sheets
What is the balance sheet equation?
Assets - liabilities = net worth
or
assets = liabilities + net worth
These are cash and assets that may be easily converted to cash.
Current Assets
These are assets that are difficult to liquidate
Fixed Assets
These assets are also called intangibles or goodwill. It represents things that are difficult to value.
Other Assets
These are liabilities that are due now or in the near future (within 12 months)
Current Liabilities
This is debt that will not be paid off in the near future. It will normally be notes and bonds. .
Long term liability
What does the net worth section on a balance sheet contain?
- Preferred stock
- Common stock
- Capital in excess of par
- Retained earnings
This figure is the amount of money that a company can spend (or lose) and remain operational.
Working Capital
What is the formula for working capital?
current assets - current liabilities = working capital (expressed to dollar amount)
This figure is a better figure to use when comparing the liquidity of a company.
Current ratio
What is the formula for current ratio?
current assets : current liabilities = current ratio (2:1, 1.25:1) Expressed as a ratio
Also called as quick ratio, this ration is the test of a company’s liquidity if everything really goes bad.
Acid ratio
What is the formula for acid ratio?
(current assets - inventory): current liabilities = acid ratio
(Expressed as a ratio. 0.7 : 1, 1.1:1)
What is the most common measure of long term solvency?
Debt ratio
This is a measure of how much of a corporations net worth is derived from long term debt.
Long term solvency
A corporation with a debt ratio that is higher than the industry average is said to be
Highly leveraged
This summarizes a corporations revenues and expenses for a fiscal period. - usually quarterly, year to date, or the full year. It compares revenue with costs and expenses during the period. It reflects the business activity in cash flow over a specific time period. Analysts use this to judge the efficiency of a company’s operation and its profitability.
Income statement (also called profit and loss or P&L)
This is calculated by dividing the earnings available to the common shareholder by the number of outstanding shares
Earning per share (EPS)
This is a measure of the amount of earnings a company makes compared with its current market value.
PE ratio
What is the formuta for PE ratio?
CMV / EPS = PE ratio
