Financial Statement Analysis
What is one thing an income statement tells you about a company?
Financial Health
What is the biggest difference between stocks and bonds?
Stocks = Ownership in a company
Bonds = Loan to a company or other entity
What are two ways companies add cash to their balance sheet?
1) Sell products.
2) Issue debt or stock
What are three benefits to a well diversified asset allocation strategy?
1) Reduced portfolio volatility
2) Provides Stability
3) Enhances Risk Adjusted Returns
EBITDA is widely considered an important financial metric, but why is that and what does it stand for?
EBITDA = Earnings before interest, taxes, depreciation and amortization.
It is important because it is a standardized way to compare companies to each other.
Bonds are broken up into investment grade and non-investment grade. What rating separates investment grade from non-investment grade?
BBB is the lowest investment grade rating and BB is the highest investment grade rating.
What are the three ways a company uses cash?
1) A company needs cash to pay suppliers, buy raw materials, and pay its employees.
2) It also uses cash to make investments, pay dividends, and buyback shares.
3) Maintain business stability and plan for the future.
What are the three strategies for asset allocation? What are the differences?
1) Strategic Asset Allocation: Establishes a long-term target allocation and periodically rebalances to maintain that allocation.
2) Tactical Asset Allocation: Adjusts allocations based on short-term market opportunities or economic conditions.
3) Dynamic Asset Allocation: Utilizes a rules-based approach to adjust allocations dynamically in response to changing market conditions.
The Balance sheet has three components to it that make up the central accounting equation - what are those three components are what is the central accounting equation?
Assets, Liabilities, Shareholder Equity.
Assets = Liabilities + Shareholder Equity
At maturity bonds are bucketed into either Bills, Notes, or Bonds. What is the major difference between these three categories?
Bills - shortest maturity - one year or less from maturity date.
Notes - Typically 1-10 years in maturity.
Bonds - Maturity at issuance of longer than 10 years.
What are thee three mechanisms of cash management?
1) Internal Cash Management Portfolio – The benefit is full control over investment selection. The downside – lacks broader diversification + expertise provided by a traditional fund manager.
2) Bank savings/checking account – The main benefit is that it is federally insured (up to a certain amount). The downside – lower yields than comparable products.
3) Money market fund – The benefit is broader diversification and expertise from fund manager + more competitive rate of return. The downside – management fee + less direct control over the investment strategy.
This asset class combines income from bonds and price appreciation - what asset class is it?
Real Estate
What is the accounting practice called that publically traded companies must follow?
GAAP = Generally Accepted Accounting Principles
What are three sub categories of bond types?
Government, Corporate, Asset Backet Securities (ABS), Mortgage Backed Securities (MBS)
What is one difference between a money market fund and a bank savings account?
Money Market Fund - Investing in short term bond securities.
Savings Account - No investment and the money just sits in an account.
1) Risk Tolerance
2) Time Horizon
3) Return needs and Return Expectations
What does the statement of cash flow tell you that the income statement does not?
Tells you how cash is being used in the entire firm - the income statement only tells you how much you make.
When the price of a bond moves, it causes the yield to move as well. How does the yield of a bond move relative to the price and why?
Prices and yields are inversely related. Price up, yield down and vice versa.
This is because bonds mature at Par and the price you pay affects your return (yield).
When one company acquires another company in cash, what is the biggest risk to the balance sheet?
A risk to the balance sheet when one company acquires another for cash is maintaining enough liquidity to continue operations.
What is the guiding principal for an organization or individual's asset allocation decisions?
Investment Policy Statement