Equity Fundamentals eLearning Courses

Introduction to Companies and Stocks

• Three types of business ownership: proprietorships, partnerships and companies
• Companies divide their ownership into a specified number of shares called "common stock" (or "ordinary shares" in the UK)
• Preferred stocks offer some advantages over common stocks
• Dividends are periodic payments made by companies to their shareholders

Introduction to Financial Statements (CFA Level I Suggested Reading)

• The annual report constitutes the most authoritative disclosure of the financial health and performance of a company
• Balance sheet: The balance sheet gives a snapshot of the financial health of a company at the end of an accounting period
• Income statement: The income statement shows the revenues, expenses and the earnings of a company during the given accounting period
• Cash flow statement: The cash flow statement shows the inflows and the outflows of cash during a given accounting period

Financial Ratios and Multiples (CFA Level I Suggested Reading)

• Financial ratios can provide a useful insight into a firm's performance over time and in comparison to other competing firms
• An organisation's performance may be analysed using the following category ratios: margin ratios, leverage ratios, asset utilisation ratios, return on capital ratios, solvency ratios and liquidity ratios
• Trading multiples are a simple way to value stocks by comparing them to other stocks in the market
• EPS is a popular indicator of a company's financial performance
• Understand how the P/E ratio, the EBITDA multiple, the market-to-book multiple and the P/S multiple are calculated
• Various industrial sectors give rise to their own set of specialised multiples, such as price-to-subscriber, price-to-research, etc

Equity Valuation Models (CFA Level I Suggested Reading)

• The dividend discount model is a simple and popular model for estimating the value of a stock based on its current and future dividends
• The value of a stock according to this model is the sum of the present values of all the expected future dividends discounted at the rate of return expected by investors in the stock market
• Understand one-stage, two-stage and three-stage model calculations
• The value of money falls with time
• The process of discounting and adding together all cash flows due to a security or an investment is called the NPV
• WACC is the weighted average cost of debt plus equity
• The cost of equity is calculated using the CAPM
• Beta is the multiplier of the equity risk premium in the CAPM
• The firm value of a company is the sum of the present values of the cash flows in the forecast period and the terminal value (discounted back at the WACC)
• he firm value minus the market value of debt gives the value attributable to a company's shareholders

Financial Shenanigans

The past decade has witnessed a series of debacles - from Enron to Parmalat and Satyam, due to accounting manipulation. In addition to these high profile cases many other firms have been tainted by allegations of accounting improprieties. This reading assignment looks at some such cases of creative accounting.

The use of accounting irregularities can boost a company's stock price. Therefore analysts must look out for such shenanigans.

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