Flashcards in Business VII Deck (32)
What are the three major financial statements?
- income statement
- balance sheet
- cash flows
An accounting item in a company's income statement that is non-recurring in nature.
- they are usually excluded by analysts and investors while evaluating a company.
- they usually have a negative impact on operating earnings, but may occasionally have a positive impact as well.
A group of securities that are fundamentally similar to each other while being fundamentally different from other asset classes.
What are the 3 main asset classes?
- Equities (aka "stocks")
- fixed income (aka "bonds")
- cash equivalents (aka "CDs, commercial paper, etc")
What is the fourth asset class?
- in recent years a fourth asset class has been added:
- alternative investments (aka "real estate, commodities, hedge funds, private equity, art")
Equities (asset class)
Shares in the ownership of publicly owned companies.
- their value goes up and down with investors' perceptions of the firm's performance.
- historically, this asset class provides the highest return, but is the most volatile.
Fixed income (asset class)
Any investment that pays the owner a fixed return each year for a set number of years, and then returns the principle to the buyer.
- bonds and annuities are types of fixed income.
- a fixed income's value is more stable than stocks, but does fluctuate in response to changes in market interest rates.
Cash equivalents (asset class)
These include cash and short-term liquid securities such as:
- government issued securities
- banker's acceptances
- commercial paper.
This is the most stable asset class.
Real estate (asset subclass)
- investment properties
- funds that hold groups of homes and investment properties
While these tend to be more stable than stocks, their value can rise or fall sharply depending on economic conditions.
An investment that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's:
- risk tolerance
- investment horizon
An investment or company thought to be profitable in the long-term or very long-term.
- the investor should not plan for an immediate or short-term return, but rather when they are older and have grey hair.
Buy and hold
A passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market.
This is done because:
- with a long time horizon equities render a higher return than other asset classes such as bonds.
- it has tax benefits (long term investments are taxed at a lower rate than short term investments).
The degree of variability in investment returns that an individual is willing to withstand.
- a person should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments.
- investors who take on too much risk may panic and sell at the wrong time.
The length of time over which an investment is made or held before it is liquidated.
- time horizons can range from seconds (in the case of a day trader), all the way up to decades for a buy-and-hold investor.
- knowing your time horizon is important when it comes to choosing the type of investments you want and your asset allocation.
The total length of time that an investor expects to hold a security or portfolio.
- the investment horizon is used to determine the investor's income needs and desired risk exposure, which is then used to aid in security selection.
Net Asset Value
A mutual fund or exchange-traded fund's per share value.
- Calculated by dividing the total value of all the securities in its portfolio (less any liabilities) by the number of fund shares outstanding.
Price to Earnings Ratio
- a company's share price compared to its earnings per share (EPS).
To calculate: divide share price by EPS.
It indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company's earnings.
What does P/E ratio indicate?
If a company were currently trading at a P/E of 20, the interpretation is that an investor is willing to pay $20.00 for $1.00 of current earnings.
- a high P/E ratio suggests that investors are expecting earnings growth in the future compared to companies with a lower P/E.
- a low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends.
When a company has no earnings or is posting losses, in both cases P/E will be N/A.
An option is a derivative tuts represents a contract sold by one party (option writer) to another party (option holder).
- the contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed upon price (strike price) during a certain window of time.
The total dollar market value of all of a company's outstanding shares.
(Determines a company's size)
Number of shares outstanding X Current market price of 1 share = Market Cap
Earnings Per Share
The portion of a company's profit allocated to each outstanding share of common stock.
EPS is an indicator of a company's profitability.
To Calculate: Divide net profit by total shares.
A company's total earnings or profit.
- net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes, and other expenses.
Used to calculate Earnings Per Share.
Referred to as "the Bottom Line" (last line on balance sheet after all deductions have been taken out).
Preeminent strategy for retail stores. Gives shoppers the option to buy online and:
- pickup in-store
- ship from store
- get same-day delivery
(This provides more convenience, value, and selection than physical retail outlets.)
What does it mean, to "float debt"?
To sell debt.
(To issue bonds or commercial paper)
Free Cash Flow
- a measure of financial performance calculated as "operating cash flow" MINUS "expenditures".
- represents the cash a company is able generate after laying out the money required to maintain its "asset base".
- FCF is important because it allows a company to pursue opportunities that enhance shareholder value.
- a margin ratio used to measure a company's pricing strategy and operating efficiency.
Tells how much a company makes (before interest and taxes) on each dollar of sales.
- the higher the company's operating margin, the better off it is.
- divide operating income by net sales.
The amount of debt a company is carrying in its books.
- this is found in a company's balance sheet.
- companies may incur debt for numerous reasons (business expansion, making an acquisition)
A metric that is a useful insight into the financial health of a company.
- divide company's total debt by its total assets.
- a low debt ratio is usually a sign of a healthy company.
(aka "market exposure")
- the dollar amount of funds or percentage of a portfolio invested in a particular type of security, market sector, or industry, which is expressed as a percentage of total portfolio holdings.
- it represents the amount an investor can lose from the risks unique to a particular investment.
- the greater the market exposure, the greater the market risk.