Professional Documents
Culture Documents
Analyzing
Common Stocks
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Monetary Policy
Money supply
Interest rates
Other Factors
Inflation
Consumer spending
Business investments
Foreign trade
Currency exchange rates
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What It Tracks
Personal Income
Retail Sales
Consumer attitudes
Money Supply
Consumer Prices/
Producer Prices
Inflation
Employment
Business Production
Housing Starts
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Competitive position
Composition and growth in sales
Profit margins and dynamics of earnings
Asset mix (i.e. cash balance, inventory, accounts
receivable, fixed assets)
Financing mix ( i.e. debt, stock)
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Where Do We Start?
Interpreting Financial Statements
Using Financial Ratios
Fundamental analysis is often the most
demanding and most time-consuming
phase of stock selection
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Financial Statements:
The Balance Sheet
Summary of a companys assets, liabilities, and
shareholders equity at a point in time
Assets: what the company owns (i.e. cash, inventory,
accounts receivable, equipment, buildings, land)
Liabilities: what the company owes (i.e. bills, debt)
Equity: capital the stockholders have invested in
the company
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Table 7.3
Corporate
Balance
Sheet
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Financial Statements:
The Income Statement
Summary of a companys operating results over a
specific period of time, usually one year
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Financial Statements:
The Statement of Cash Flows
Summary of a companys cash flows and other events that
caused changes in companys cash
Sources of Cash: proceeds from sale of products/
services, sales of equipment, borrowing money, sale of
stock
Use of Cash: payment of wages and/or materials,
payment of operating expenses, purchases of equipment,
payment of debt, payment of dividends
What are we looking for on the cash flow statement?
Relative amounts (more cash or less cash)
Liquidity
Trends (improving vs. decreasing)
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Liquidity Ratios
Current Ratio: how many dollars of shortterm assets are available for every dollar of
short-term liabilities owed
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Activity Ratios
Accounts Receivable Turnover: how quickly the
company is collecting its accounts receivable (sales to
customers on credit)
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Leverage Ratios
Debt-Equity Ratio: how much debt the
company is using to support its business
compared to how much stockholders equity
it is using to support its business
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Profitability Ratios
Net Profit Margin: amount of profit earned from
sales and other operations
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Breaking Down
Return on Assets (ROA)
Breaking down ROA allows investors to
identify the components that are driving
company profits.
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Breaking Down
Return on Assets (ROA) (cont'd)
Breaking down ROE allows investors to identify the
impact of financial leverage on company return.
Total assets
Equity multiplier
Total stockholders equity
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$139,700,000
EPS
or $2.26
61,815,000 shares
$41.50
Price/Earnings ratio
or 18.4
$2.26
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Figure 7.1 An
Example of a
Published
Report with
Financial
Statistics
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Chapter 7 Review
Learning Goals
1. Discuss the security analysis process, including
its goals and functions.
2. Understand the purpose and contributions of
economic analysis.
3. Describe industry analysis and note how it is
used.
4. Demonstrate a basic appreciation of
fundamental analysis and why it is used.
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Chapter 7
Additional
Chapter Art
Table 7.1
Keeping Track
of the
Economy
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