Term
| Unexpected Earnings (Equation) |
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Definition
| Actual Earnings - Expected Earnings |
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Term
| What does price depend on? |
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Definition
| The information known about the market at the current time |
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Term
| What do we do to make sure the changes in price reflect revised expectations of payoffs and not just differences in risk? |
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Definition
| We subtract returns on a portfolio of firms with comparable size |
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Term
| What do markets seek causing them to constantly change with outside influences? |
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Definition
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Term
| Current Earnings (Equation) |
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Definition
| Current cash flows from operations plus current accruals |
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Term
CFO(Current) - CFO(Last Period) > 0
Means what? |
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Definition
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Term
CFO(Current) - CFO(Last Period) < 0
Means what? |
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Definition
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Term
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Definition
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Term
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Definition
| Recognizing bad news wholly, right away while waiting to recognize good news for the time when you are completely sure. |
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Term
| Unexpected Earnings (Equation) |
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Definition
| Earnings in the period - Analyst forecasts over price |
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Term
| When is the largest impact for unexpected earnings? |
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Definition
| Between day t-1 and day t+1, where t is the day the earnings are actually announced |
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Term
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Definition
| Perpetuity/ Discount Rate |
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Term
| Effect on expected future earnings (Equation) |
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Definition
| Persistent Surprise/ Discount Rate |
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Term
| Estimated Stock Price Effect (Equation) |
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Definition
| Effect on expected future earnings + Persistent Surprise - Transitory rate |
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Term
| Efficient Markets Hypothesis |
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Definition
| Once the stock price is announced then we should know completely, quickly and without bias what the price is. (Duh) |
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Term
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Definition
| Annual Report. Comprehensive Overview |
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Term
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Definition
| Quarterly Financial report filed by most companies. Unaudited but reviewed. |
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Term
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Definition
Current report updating investors about
-Loss of Assets
-Mergers and Acquisitions
-Management Turnover
-Bankruptcy
-Restatement |
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Term
| Proxy Statement (Form DEF 14A) |
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Definition
| Where you'll find Management Compensation |
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Term
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Definition
-Changes in Ownership of Stock
-Management trading in their own company's stock |
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Term
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Definition
-Principal Products
-Services
-Principal Markets
-Methods of Distribution
-Risks of the business |
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Term
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Definition
-High/Low quarterly stock prices for last two years
-Dividends paid in the last two years
-Future dividend plans |
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Term
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Definition
-"Non financial" Data
-Same store sales |
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Term
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Definition
Managements' Discussion and Analysis
-Guidance
-CAPEX Plans
-Capital Structure |
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Term
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Definition
| Two-year audited balance sheets, three-year audited statements of income, three-year audited statements of cash flows, supporting notes and schedules. |
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Term
| What types of Analyst Research Reports are good for useful, correct information about a company? |
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Definition
-News straight from the company
-Forecasting of Earnings per Share
-Industry analysis |
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Term
| What will you usually find under investor relations on a company's website? |
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Definition
- CEO Turnover
- Restatements
- Product Announcements
- Business Expansion Plans |
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Term
| What will you find in financial press? |
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Definition
- Peer Comparisons
- Criticize accounting policies |
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Term
| Why does profit fall when interest rises? |
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Definition
- Cost of capital and expenses are higher
- Consumer spending goes down (Save Vs. Spend)
- Investment |
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Term
| Ways to increase profitability |
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Definition
- Lower Costs (Standardize, scale economies, advertising, R&D)
-Product Differentiation (Customization, options, brand, unique product, customer service, marketing) |
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Term
| What are the key ratios and statistics that capture financial health of firms in the industry? |
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Definition
- General (Market share, profit margin, earnings per share, revenue growth, ROE, ROA)
- Specific (Same store sales, store count) |
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Term
| What are porter's 5 forces? |
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Definition
1. Rivalry among firms
2. Threat of new entrants
3. Threat of substitutes
4. Supplier Power
5. Buyer Power |
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Term
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Definition
| # of competitors, price based competition, maturity |
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Term
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Definition
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Term
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Definition
| Other products that a customer may prefer |
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Term
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Definition
| What kind of control do the suppliers have |
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Term
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Definition
| The control the individual buyers of your product have (VERY low) |
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Term
| Competition is a function of: |
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Definition
- Location
- Service
- Quality
- Price |
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Term
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Definition
ROA X CEL X CSL
Or:
Net Income/ Average Shareholders Equity |
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Term
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Definition
PM X ATO
Or:
(Net Income + Interest Expense(1-t))/ Beg or End Total Assets |
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Term
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Definition
| Compares the financial metrics of a firm relative to the financial metrics of some comparison group |
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Term
| What are the two types of relative analysis? |
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Definition
1. Cross-sectional analysis
2. Time series approach |
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Term
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Definition
| Compare the firm to industry peers on a number of dimensions |
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Term
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Definition
| Use the historic performance of a firm as the benchmark |
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Term
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Definition
| Compares the financial metrics of a firm to absolute levels. Matters less where they rank relative to other firms. |
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Term
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Definition
| (NI+ Interest Expense(1-t))/Sales |
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Term
| Asset Turnover (Equation) |
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Definition
| Sales/ Average Total Assets |
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Term
| What does profit margin show us? |
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Definition
| Of every $1 of sales what is left to return to investors |
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Term
| What does Asset Turnover show us? |
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Definition
| For every dollar made how well do they use their assets |
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Term
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Definition
| NI + Interest expense (1-t) |
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Term
| What is a reasonable absolute benchmark for ROA? |
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Definition
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Term
| What factors drive cross-sectional differences in ROAs? |
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Definition
1. Risk: More risk = more return
2. Economic Rents: Competitive advantages
3. Accounting Distortions: Mismeasurements |
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Term
| What is the conversion back towards the mean of ROA called? |
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Definition
1. Economic Gravity
2. Mean Reversion |
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Term
| What is a big sign having to do with the brand that you can look for if the ROA seems way too high? |
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Definition
| If they purchased their brand and the ROA is extremely high then something might be inflating it. If they did not purchase their brand then their ROA might be higher because their assets are lower. |
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Term
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Definition
| The amount of resources to benefit the investors the firm generates from every dollar of sales. |
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Term
| What do we do to make a common size income statement? |
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Definition
| Divide everything by sales to get every number as a percentage of sales. |
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Term
| What is the downfall to the common size income statement? |
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Definition
| Common size income statements will tell us what has happened but will not tell us why. For this answer we must look in the MD&A |
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Term
| Which items on the income statement are more permanent? |
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Definition
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Term
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Definition
include any relatively infrequent or non-recurring items that nevertheless tend to arise from a firm's on-going, continuing operations:
-Gains and losses on sales of securities
-Restructuring charges
-Gain or loss on sale of PPE |
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Term
| What accounts are almost always truly transitory, meaning they only happen once? |
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Definition
- Discontinued Operations
- Extraordinary Items
- Changes in Accounting Principles |
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Term
| What determines a firms profit margin? |
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Definition
- Industry Factors
- Sales Volume
- Sales Price
- Expenses |
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Term
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Definition
| Whether the industry is growing, mature or on a decline, patent protection, monopoly rents etc. |
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Term
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Definition
| Fixed costs get allocated to a larger sales base |
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Term
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Definition
| Important to examine if market share is being generated through lower pricing |
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Term
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Definition
| While improving margins through expense reduction is good, it has limits. You might need short term pains for long term gains. |
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Term
| Asset Turnover (Equation) |
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Definition
Sales/Average Total Assets
Tells of the company's ability to to collect |
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Term
| Inventory Turnover (Equation) |
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Definition
| Sales or COGS/ Average inventory |
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Term
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Definition
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Term
| How can you change asset turnover? |
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Definition
- increasing sales revenue using the same assets (Very rare)
- Outsourcing (Less assets = higher ATO but lower margins so be careful)
- Disposing of less productive assets
- Decreases when additional investments generate lower marginal revenue |
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Term
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Definition
EBI/ Avg. (Equity +Debt)
Or:
EBI/ Avg. (Total assets- operating liabilities) |
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Term
| What is the appropriate absolute benchmark for RONA? |
|
Definition
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Term
| Whats the difference between ROA and RONA? |
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Definition
| ROA includes operating liabilities while RONA does not. ROA is more common while RONA is usually more for just investor use |
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Term
| What is a reasonable absolute benchmark for ROE? |
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Definition
| Cost of Equit -> r(sub e) which is about 12% |
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Term
| Financial Spread (Equation) |
|
Definition
| Average Debt/ Average Equity |
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Term
|
Definition
| RONA - (Interest Expense(1-t)/ Average Debt) |
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