1. What is fundamental analysis?
Answer: Fundamental analysis involves evaluating a company`s financial health, competitive position, and economic factors to estimate its intrinsic value. Analysts use degrees, industry trends, economic indicators and corporate management to determine the long-term value of financial value.
2. What are the key financial statements in fundamental analysis?
Answer: The three key financial statements are:
- Income Statement: Shows a company`s revenue, expenses, and profits over a period.
- Balance Sheet: Provides a snapshot of a company`s assets, liabilities, and equity.
- Cash Flow Statement: Shows the inflows and outflows of cash, indicating liquidity.
3. What is the difference between earnings per share (EPS) and price-to-earnings (P/E) ratio?
Answer:
- EPS is a company`s profit divided by the number of shares outstanding.
- P/E ratio is the price of a stock divided by its EPS. It indicates how much investors are willing to pay for each dollar of earnings.
4. What is the significance of the P/E ratio?
Answer: The P/E ratio measures the price investors are willing to pay for a company`s earnings. A high P/E ratio may indicate that the stock is overvalued or that investors expect future growth, while a low P/E ratio may suggest undervaluation or low future growth expectations.
5. What is a company`s intrinsic value?
Answer: Intrinsic value refers to the true or fair value of a
company or asset, determined by evaluating fundamental factors such as earnings, growth prospects, risk, and the overall economic environment.
6. What is a dividend discount model (DDM)?
Answer: The DDM is a valuation method used to estimate the value of a company based on the present value of expected future dividends. It`s commonly used for companies that pay stable dividends.
7. What is the difference between a balance sheet and an income statement?
Answer: The balance sheet shows a company`s financial position at a specific point in time (assets, liabilities, and equity), while the income statement shows the company`s performance over a period (revenues, expenses, and net income).
8. What is the current ratio and why is it important?
Answer: The current ratio is calculated as current assets divided by current liabilities. It measures a company`s ability to meet short-term obligations. A ratio higher than 1 indicates good short-term financial health.
9. What is the quick ratio (acid-test ratio)?
Answer: The quick ratio is similar to the current ratio but excludes inventory from current assets. It`s a more stringent measure of a company`s ability to meet short-term obligations without relying on the sale of inventory.
10. What is return on equity (ROE)?
Answer: ROE is calculated by dividing net income by shareholders` equity. It measures a company`s ability to generate profits from shareholders` investments.
11. What is the difference between operating income and net income?
Answer: Operating income is the profit a company makes from its core business operations, excluding non-operating income and expenses. Net income is the total profit, including all revenue and expenses.
12. What is a DCF (Discounted Cash Flow) model?
Answer: A DCF model estimates the value of an investment based on its expected future cash flows, discounted to the present value. It`s used to assess the intrinsic value of a company or asset.
13. What is the difference between gross profit margin and net profit margin?
Answer:
- Gross profit margin is the percentage of revenue left after subtracting the cost of goods sold (COGS).
- Net profit margin is the percentage of revenue remaining after all expenses, taxes, and interest are deducted.
14. What is a company`s capital structure?
Answer: Capital structure refers to the mix of debt and equity that a company uses to finance its operations and growth. It impacts risk and the cost of capital.
15. What is the debt-to-equity ratio?
Answer: The debt-to-equity ratio measures the relative proportion of debt and equity financing a company uses. It`s calculated by dividing total liabilities by shareholders` equity.
16. What is a price-to-book (P/B) ratio?
Answer: The P/B ratio compares a company`s market price per share to its book value per share. It indicates whether a stock is over or undervalued relative to its book value.
17. What is a free cash flow (FCF)?
Answer: Free cash flow is the cash a company generates after accounting for capital expenditures. It`s important for determining the financial flexibility of a company.
18. What is a liquidity ratio?
Answer: Liquidity ratios measure a company`s ability to cover its short-term obligations with its most liquid assets. Common liquidity ratios include the current ratio and quick ratio.
19. What are operating cash flows?
Answer: Operating cash flows represent the cash generated or used by a company`s core business activities. They exclude cash flows from investing or financing activities.
20. What is the significance of EBITDA?
Answer: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company`s operating performance. It`s often used to compare companies in the same industry, as it excludes non-operating expenses.
21. What is the difference between a stock split and a stock dividend?
Answer:
- Stock split increases the number of shares outstanding by issuing more shares to existing shareholders.
- Stock dividend is when a company issues additional shares as a dividend to shareholders.
22. What is a company`s working capital?
Answer: Working capital is calculated as current assets minus current liabilities. It represents a company`s ability to cover its short-term liabilities with its short-term assets.
23. What is a company`s beta?
Answer: Beta measures a stock`s volatility relative to the overall market. A beta of 1 indicates that the
stock`s price moves with the market, while a beta greater than 1 means the stock is more volatile than the market.
24. What is the significance of a company`s dividend payout ratio?
Answer: The dividend payout ratio is the percentage of earnings paid out as dividends. A high payout ratio could indicate limited reinvestment in the business, while a low ratio may suggest growth opportunities or financial conservatism.
25. What is a bond`s yield to maturity (YTM)?
Answer: YTM is the total return an investor can expect to receive if a bond is held until maturity. It considers the bond`s current price, coupon payments, and the time to maturity.
26. What is the difference between debt and equity financing?
Answer: Debt financing involves borrowing funds that must be repaid with interest, while equity financing involves selling shares of the company in exchange for capital.
27. What are economic moats?
Answer: An economic moat refers to a company`s competitive advantage that protects it from competitors. It can be due to factors like brand strength, cost advantages, or network effects.
28. What is a company`s growth rate?
Answer: A company`s growth rate refers to the rate at which its revenues, earnings, or other financial metrics increase over time. It can be calculated using historical data or projected future growth.
29. What is market capitalization?
Answer: Market capitalization is the total value of a company`s outstanding shares, calculated by multiplying the stock price by the number of shares outstanding.
30. What is the difference between systematic and unsystematic risk?
Answer:
- Systematic risk is the risk inherent to the entire market or market segment.
- Unsystematic risk is specific to an individual company or industry and can be reduced through diversification.
31. What is the significance of a company`s return on assets (ROA)?
Answer: ROA measures a company`s ability to generate profit from its assets. It`s calculated by dividing net income by total assets.
32. What is the difference between the income statement and the cash flow statement?
Answer: The income statement shows a company`s revenues and expenses over a period, while the cash flow statement tracks the inflow and outflow of cash during that period.
33. What is the weighted average cost of capital (WACC)?
Answer: WACC represents a company`s cost of capital, weighted by the proportion of debt and equity financing. It`s used to evaluate investment projects.
34. What is the importance of the dividend yield?
Answer: Dividend yield is calculated as annual dividends per share divided by the stock price. It shows how much cash flow investors can expect to receive relative to the stock`s price.
35. What is the PEG ratio?
Answer: The PEG ratio is the P/E ratio divided by the annual earnings growth rate. It provides a more complete picture of a stock`s valuation by factoring in growth.
36. What are qualitative factors in fundamental analysis?
Answer: Qualitative factors include company management, brand strength, industry position, and competitive advantages, which can influence long-term performance.
37. What is the difference between a bearish market and a bullish market?
Answer:
- A bearish market is characterized by a prolonged decline in stock prices (typically 20% or more).
- A bullish market is a period of rising stock prices.
38. What is the price-to-sales (P/S) ratio?
Answer: The P/S ratio is calculated by dividing a company`s market capitalization by its total revenue. It`s used to assess how much investors are willing to pay for each dollar of sales.
39. What is the significance of the interest coverage ratio?
Answer: The interest coverage ratio measures a company`s ability to pay interest on its debt. It`s calculated by dividing EBIT (Earnings Before Interest and Taxes) by interest expenses.
40. What are the main risks in fundamental analysis?
Answer: The main risks include changes in market conditions, economic downturns, inaccuracies in financial data, and company-specific risks such as management issues.
41. How do interest rates affect stock prices?
Answer: Rising interest rates tend to make borrowing more expensive, which can negatively impact corporate profits and stock prices. Conversely, falling interest rates can boost profits and stock prices.
42. What is the difference between leading and lagging indicators?
Answer:
- Leading indicators predict future economic activity, such as stock market returns.
- Lagging indicators reflect past economic activity, such as GDP and unemployment rates.
43. What is a company`s competitive advantage?
Answer: A competitive advantage is a unique feature or set of features that allows a company to outperform its competitors in the market, such as a superior product, cost leadership, or a strong brand.
44. What is a company`s market share?
Answer: Market share refers to the percentage of total sales in an industry or market that a particular company controls.
45. What is the significance of a company`s gross margin?
Answer: Gross margin represents the percentage of revenue left after deducting the cost of goods sold. It indicates the efficiency of a company in producing and selling goods.
46. What is the significance of a company`s operating margin?
Answer: Operating margin measures the proportion of revenue left after covering operating expenses. It reflects the efficiency of the company in generating profits from operations.
47. What is the significance of inflation in fundamental analysis?
Answer: Inflation can erode the purchasing power of consumers and increase input costs, which may affect corporate profits and valuations.
48. What is a sector rotation strategy?
Answer: Sector rotation involves shifting investments between different industry sectors based on economic cycles. For example, investors may invest in consumer staples during economic downturns and in technology during growth periods.
49. What is the significance of economic data like GDP, CPI, and unemployment rates?
Answer: Economic data provides insights into the overall health of an economy. GDP indicates economic growth, CPI measures inflation, and unemployment rates indicate the strength of the labor market.
50. What is the role of management in fundamental analysis?
Answer: The quality of a company`s management is critical for its long-term success. Analysts evaluate leadership, decision-making, and corporate strategy to gauge the company`s ability to execute its business plan effectively.
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