SIE15

The components of the Balance Sheet: Assets

Assets: 3 categories of assets. -Current Assets: cash and assets that may be easily converted to cash. Securities, accounts receivable, and the company's inventory are current assets. -Fixed Assets: assets that are difficult to liquidate. Real estate, furniture, equipment, all examples of fixed assets. -Other Assets: called intangibles or goodwill. This category represents things that are difficult to value. Trademarks, copyrights, reputation, and intellectual property are examples of this category.

Corporate Financial Reports

A corporation's financial reports provide fundamental analysts the data they need to understand the financial strengths and weaknesses of a company. From the information on these statements, we can calculate ratios that allow us to compare a company's financials with those of a competitor. Financial reports are released quarterly and annually. The 2 primary reports are the Balance Sheet and the Income Statement

Growth or Special Situtation

A growth 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 to a specific industry. A special situation is normally applied to a specific company, but it could apply to an industry as a whole. Could be anything from a hostile takeover to a cultural shift that moves the consumer away from the product. Unlike growth, special situation might not be a positive condition.

Financials

Components and uses of a balance sheet....

Why do they call it a balance sheet?

It reflects the balances of the different accounts. It was traditionally set up in 2 columns and the figgures at the two columns should be equal. If the balance doesn't balance, try again.

The components of the Balance Sheet: Liabilities

Liabilities are divided into 2 categories: Current Liabilities: liabilities that are due now or in the near future( within 12 months). Current liabilities would include accrued wages, accrued taxes, accounts payable, or interest payments. Long-term Liabilities: Debt that will not be paid off in the near future. For a corporation, this is typically notes and bonds. The interest that is due in the next 2 months will be reflected in current liabilities but the principal is a long term liability.

Balance Sheet Analysis

Short Term Liquidity Working Capital: This figure is the amount of money that a company can spend (or lose) and remain operational. The formula for working capital is CURRENT ASSETS - CURRENT LIABILITIES = WORKING CAPITAL Current Ratio: This figure is a better figure to use when comparing the liquidity of a company. The formula for current ratio is: CURRENT ASSETS:CURRENT LIABILITIES = CURRENT RATIO Acid ratio: Also called the quick ratio, this ratio is the test of a company's liquidity if everything got really bad. The formula for acid ration is: (current assets - inventory):current liabilities = acid ratio

Classify Industries by type:

Some industries perform better, or worse, depending on the business cycle. Industries are divided for this purpose into four broad classes: Cyclical Noncyclical Countercyclical Growth

Countercyclical Industries

Tend to turn down as the economy heats up and tend to rise when the economy turns down. These are producers of a product that people buy when they are scared and looking for safety. Gold mining and refinement are examples. People tend to flock to gold when the economy is weak and move away from gold and precious metals as the economy improves and investors move into investments with a better return potential.

Net Worth (shareholder's equity)

The Net worth section has several components: Preferred Stock: any funds received from the sale of preferred stock Common Stock: the par value of the common stock Capital in excess of par: Moneys received from the sale of common stock in excess of the par value. Retained earnings: The earnings the company has made that have not been paid out as dividends.

Long-term Solvency

The most common measure of long-term solvency is the debt ratio (debt-to-equity ratio). Measure of how much a corporation's net worth is derived from long-term debt. A corporation with a debt ratio that is higher than the industry average is said to be HIGHLY LEVERAGED. Formula for debt ratio is: long-term debt / (long term debt + net worth) = debt ratio

Components of the Income Statement

There are 2 calculations you may see from the income statement: Earnings Per Share (EPS) and the price/earnings ratio (PE ratio) EPS is calculated by dividing the earnings available to the common shareholder (earnings) by the number of outstanding shares. The PE ratio is a measure of the amount of earnings a company makes compared with its current market value (CMV, or the stock's price). The formula for PE ratio is: CMV/EPS = PE ratio (expressed as a number)

Q: Which of the following best fits the description of a growth stock?

A: A) Common shares in companies that retain earnings and pays little or no dividends B) Common or preferred shares in companies, which experience growth in unusual, nonrecurring profitable circumstances C) Preferred shares in companies that back stated dividends with investments in pharmaceutical companies D) Common shares in companies that pay a high dividend on rapid growth experience A is the answer Explanation: Most every industry passes through phases; introduction, growth, maturity, and decline. An industry is in its growth phase if it is growing faster than the economy as a whole due to e.g. technological changes, new products, or changing consumer tastes. Because growth companies retain nearly all of their earnings to finance business expansion, growth stocks pay little or no dividends.

Q: In order to calculate the earnings per share you would need information from

A: both the balance sheet and the income statement. Explanation: Earnings per share (EPS) is earning available to the common shareholder (from the income statement) divided by the number of outstanding shares (found in the net worth section of the balance sheet). The stock's current market value is not used in the calculation.

Indicate the impact of the business cycle on different industries

Cyclical Industries: tend to do well in expansions and poor in contractions Defensive Industries: tend to be less impacted by the business cycle, maintaining sales throughout the cycle. Defensive industries do not drop as much as cyclical ones in poor economies, and they do NOT grow as fast as cyclical industries in expanding economies. Countercyclical industries: do better when economy is weak, and lose value when the economy is strong. Growth Industries: don't care about the economy: just keep growing (until they don't). Special Situations: are situational; some specific circumstance is affecting them

Noncyclical (defensive) industries

Defensive industries are least affected by normal business cycles. Produce nondurable goods (consumables) such as food, pharmaceuticals, tobacco. Public consumption of such goods remains fairly steady throughout the business cycle. During recessions and bear markets, stocks in defensive industries generally decline less than stocks in other industries, but during expansions and bull markets, defensive stocks may advance less. Investments in defensive industries tend to involve low risk and lower returns. Noncyclical/Defensive industries: Food Utilities (highest dividend payout ratio) Clothing Drugs Alcohol Tobacco

Cyclical Industries

Highly sensitive to business cycles and inflation trends. Most cyclical industries produce durable goods, such as heavy machinery and raw materials, such as steel and automobiles. During recessions, demand for such products declines as manufacturers postpone investments in new capital goods and consumers postpone purchases of these goods. Cyclical Industries: Steel Autos Heavy Equipment Capital goods (washers and dryers etc.) If the company produces industrial metals such as steel or aluminum or makes stuff from steel or aluminum, it is probably cyclical

The Income Statement

Summarizes a corporation's revenues and expenses for a fiscal period. (quarterly, year to date, or 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. Fundamental analysts use the income statement to judge the efficiency of a company's operation and its profitability.

The Balance Sheet

The balance sheet 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). The difference between these two figures is the corporation's equity, or net worth. A corporation can buy assets using borrowed money (liabilities) and equity raised by selling stock. The value of its assets must equal (balance with) the value of its liabilities and equity. The balance sheet cannot tell the analyst whether the company's business is improving or deteriorating. The balance sheet also does not measure the profitability of a business.