Question

Be able to explain where companies release information (types of filings, what type of information is included in each, how they differ)

Where can you find other information about the company’s financial health, outside of the main financial statements?

What do we need to know about a company’s business/competitive environment? Why is this important when analyzing the company?

What are things that the quality of forecasts/valuation depends on?

What is net working capital (both what goes into the calculation, and what information is it really providing us)?

What is a cash conversion cycle? How can a company try to alter it and why?

What is the purpose (potential benefit) of accrual accounting? What is the problem?

Answer 1

We can find Sec fillings 10k for quarterly reports and 10Q for annual report.

You can go to morning star or check out various databases lioke bloomberg Thomson Eikon or Capiq and use their analysis.

Company business is important because in what type of business it is there, how many competitors are there. If a company is in telecom sector and a new telecom company arrives, then it will affect our company also.

Quality of forecast depends upon the quantitaive and qualitative factors.Like we do the DCF valuation based on numbers but we can do qualitative research based on SWOT analysis or PESTEL Analysis.

Net working Capital is Current Assets- Current Liabilities. It tells us hou much of Current Assets we have over our Current Liabilities. In simple terms For 1Current Liability how much Current Assets do we have to pay it off.

Cash Coversion Cycle is the time taken by company to covert its resorces into cash.A company can alter it by reducing AP or AR and vice-versa.

It is calculated by

The cash conversion cycle is calculated as:

CCC = DIO + DSO - DPO

where DIO = days inventory outstanding

DSO = days sales outstanding

DPO = days payable outstanding

Accrual concept: It recognizes revenue when earned and to match expenses with revenues. This means that the economic effects of revenues and expenses are recorded when earned or incurred, not when cash is received or paid; e.g. A carpenter provides work worth Rs 10,000 to its customer in 2013, but receives only Rs 7,000. But as per accrual concept , the carpenter will record income of Rs 10,000 in 2013

A plumber provides service worth Rs 1,000 to its customer in July 2013, but receives the money only in September. The plumber also had to pay wages in cash to its workers amounting to Rs 600 in July Case 1 – If we follow accrual basis: In July: Revenues = Rs 1,000 and Expenses = Rs 600 . The net profit = Rs 1,000 – Rs 600 = Rs 400 In September: Revenues and Expenses are NIL Case 2 – If we follow cash basis: In July: Revenues = NIL and Expenses = Rs 600 . The net profit = Rs 0 – Rs 600 = Rs (600) Loss In September: Revenues = Rs 1,000 and Expenses = NIL . The net profit = Rs 1,000 – Rs 0 = Rs 1,000 Reasons why accrual is better than cash basis: The company is not matching revenues with expenses for a specific period, when following cash basis. This provides a distorted picture of profits In cash basis, the volatility in sales/costs etc. can be very high depending on level of credit sales and credit purchases