INVESTING IN STOCKS: A BEGINNERS GUIDE WARREN WILLIAM WWW.SMARTEST-DATA.COURSES
“If you think education is time consuming and expensive, try ignorance” WARREN WILLIAM WWW.SMARTEST-DATA.COURSES
INVESTING IN STOCKS: A BEGINNERS GUIDE Table of Contents Course overview 5 Lecture Three: Profit and Loss 23 Introduction 6 23 Module One: ACCOUNTING 9 • Revenues 24 Lecture One: Administration 9 25 9 • Gross Operating Profit • Accounting 10 26 • Annual Report 11 • Earnings Before Interest, 27 • Financial Statements 12 Taxes, Depreciation and 28 • Board of Directors 13 Amortization (EBITDA) 29 • Dividends 14 # • Chairman / Chairwoman 15 • Earnings Before Interest • Chief Executive Officer (CEO # and Taxes (EBIT) Quiz • Earnings (Net) • Free Cash Flow • Depreciation Amortisation Quiz Lecture Two: Balance Sheet 16 Lecture Four: Financial Ratios 30 • Total Assets 16 • Return on Assets (ROA) 30 • Total Liabilities 17 • Return on Equity (ROE) 31 • Shareholders' Equity 18 • Interest Coverage 32 • Current Liabilities 19 • Current Ratio 33 • Current Assets 20 • Total Debt-to-Equity Ratio 34 • Long-Term Assets 21 • Enterprise Value 35 • Long-Term Debt 22 • Book Value 36 # # Quiz Quiz WWW.SMARTEST-DATA.COURSES
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS 38 Module Three: INVESTING 53 Lecture One: Economics 38 Lecture One: Investments 53 38 53 • Macro Environment 39 • Benchmark Index 54 • Macroeconomics 40 • Beta 55 • Microeconomics 41 • Due Diligence 56 • Economic Cycle 42 • Efficient Frontier 57 • Balance of Payments 43 • Financial Markets 58 • Monetary Policy 44 • Large-Cap Stocks 59 • Yield Curve # • Industry Classification # Quiz Quiz Lecture Two: Leading Indicators 45 Lecture Two: Lecture Two: Stocks 60 • Leading Indicators 45 • Alpha 60 • Inflation 46 • Insider Trading 61 • Unemployment 47 • Initial Public Offering (IPO) 63 • Growth 48 • Price Ratios 64 • Nonfarm Payrolls 49 • Investment Horizon 65 • Consumer Price Index (CPI) 50 • Equity Risk Premium 67 • Durable Goods Orders 51 • Illiquid Stocks 68 # Quiz Quiz # WWW.SMARTEST-DATA.COURSES
INVESTING IN STOCKS: A BEGINNERS GUIDE Course overview After the course you will be able to: • Understand the key roles in corporate administration. • The key functions that come together to successfully administer a company. • Describe the three financial statements. • Understand the role of each financial statement. • Understand how the Balance Sheet is structured. • Grasp the different levels in the Profit and Loss Statement. • How to analyse the various levels in the Profit and Loss. • Understand the ratios used to analyse the Financial Statements. • Follow the key leading groups of economic indicators. • Discover the vast world of investing in stocks. • Valuation techniques • Investment vehicles • Understand stock trading theory, basic functions, characteristics, pricing. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES #5
INVESTING IN STOCKS: A BEGINNERS GUIDE INTRODUCTION This course is a quick introduction to investing in the the stock market. There are many topics to cover in investing in stocks, so it is a process, and it will take commitment. Three tools will be used to assist you in learning. 1. Reading Material 2. Videos 3. Quizzes In a very investing in stocks can be complex or simple. I prefer to KISS, meaning Keep it Super Simple in this four-step process. 1. Understand the trends in the Stock Market 2. Understand Valuations 3. Understand the Story 4. Execute the trade and manage the risk These are very broad topics and with your feedback they can be covered in future courses. As this is a free course you can pay me back by your feedback and leaving your comments. This course consist of three Modules, seven lectures and forty-nine topics. • Module One: Accounting • Module Two: Economics • Module Three: Investing In Module One, this will cover how a company is administered and accounting. In the second Module there will be an introduction to the common terms used in Economics. What are the leading indicators and what the stock market pays attention to. Then in Module Three, general concepts around investing will be discussed. This and in subsequent courses the aim will be to build your understanding and knowledge about the stock market. How to be prepared in terms of data, from Finscreener or Barchart and trading Apps such as eToro or FX PRIMUS. Then how the stock market works, and what are the benefits and risks of investing in stocks. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES #6
INVESTING IN STOCKS: A BEGINNERS GUIDE INTRODUCTION Stocks, shares or equities, represent ownership in a publicly traded company. When investors buy stocks, they become part owners of the company. They have a claim to a portion of its assets and earnings. Stocks are traded on stock exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq. The stock market allows investors to buy and sell stocks. The process of trading stocks involves placing orders through a brokerage account. Investors can place a market order, which means buying or selling stocks at the prevailing market price. Alternatively, investors can place a limit order. This specifys a maximum purchase price or minimum selling price for the stock. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES #7
Module One: ACCOUNTING Lecture One: Administration Lecture Two: Balance Sheet Lecture Three: Profit and Loss Lecture Four: Financial Ratios WARREN WILLIAM WWW.SMARTEST-DATA.COURSES
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 1. ACCOUNTING The key role of Accounting is to prepare the three Financial Statements, produced annually. This is done by classifying all the financial transactions of a Company over the Financial Year. The role of Accounting in a business is to prepare the three financial statements at the end of an accounting period typically a 12-month Financial Year (FY). The role of Accounting is to classify items, probably in accordance with the accounting standards set under GAAP or IFRS. The Accountant records history, this enables a comparison to be made of a Company’s performance over several FYs. An Accountant does not project forward a company’s earnings nor value a company, that’s for the Investment Community. Collectively, the three statements become the Annual Accounts. Included in the Annual Accounts are the Profit and Loss, the Balance Sheet and the Cash Flow Statement. When presented the three combined financial statements provide a concise summary of all financial transactions incurred during the FY covering the company's operations (Sales), financial position, assets and liabilities and cash flows. The financial statements are fundamental to any business and the accounts are reported to government entities, agencies, regulators and are used by the investment community to value a company’s investment potential and future business prospects. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES #9
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 2. ANNUAL REPORT The Annual Report is the major publication produced by a Company, it contains the three audited financial statements, information about the Company’s business activities and management structure. An Annual Report is a document that contains a Company's audited year-end financial results, summarised in the Profit and Loss, Balance Sheet and Cash Flow Statement. The Annual Report will contain information regarding the Management structure and summarises the company's financial condition, legal liabilities, future plans and Notes to the Accounts. For a listed Company, the Annual Report must be filed with the local regulator, in the U.S, this is the SEC. The Annual Report should be made available to Shareholders, Creditors and other groups with a vested interest. An Annual Report could also describe issues that could not be resolved in preparing the Report, under the Notes to the Accounts. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 10
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 3. FINANCIAL STATEMENTS A Company’s Annual Accounts are comprised of the three Financial Statements, the Profit and Loss (P&L), the Balance Sheet and the Cash Flow Statement. There are three Financial Statements which combined make up a company’s Annual Accounts. In general, they are prepared under one of two main Accounting Standards, GAAP (Generally Accepted Accounting Principles) – U.S. financial reporting and IFRS (International Financial Reporting Standards) which is followed in 90 countries. The two Standards have merged and are now quite similar. The three financial statements are the Profit and Loss (P&L), which is a statement of Income & Expenses over the last 12 months. The Balance Sheet, a snapshot of the Company’s Assets and Liabilities and the Cash Flow Statement, focusing on cash transactions and the overall cash position. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 11
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 4. BOARD OF DIRECTORS The Board of Directors are appointed by Shareholders to represent their best interest. Further the Board oversees the activities of the company’s executive management. The Board of Directors (Board) is a group of individuals elected by a vote of the Shareholders charged with the oversight of the company's executive management. The Board represents the interest of Shareholders and must act and advise in their best interest. The Board will appoint a Chairman and the company's CEO. The CEO will be a Board Member, other members can be either Executive who are company employees or non-Executive external to the company. It is considered best, to have non-Executive members in the majority sitting on the Board. On occasions the CEO will also be the Chairman of the Board, this is not ideal for transparent oversight of the company's activities. A Board of Directors will meet several times a year, probably quarterly. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 12
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 5. DIVIDENDS A Dividend is part of the reward to shareholders, determined by the Board of Directors. When the Dividend per Share is divided by the Share Price this gives the Dividend Yield, expressed as a percent. The Net Profit of a company can be held for future investment (e.g., CAPEX) or distributed to Shareholders. The portion that is distributed to Shareholders is the Dividend. The Dividend is determined by the Board of Directors and is part of the reward to shareholders, maybe by around 1/3. A Cash Dividend is not the only way to pay Dividends, a Dividend Reinvestment Plan could be offered. The Dividend is announced on a per Share basis. If the quoted value of the Dividend is divided by the quoted Share Price this will give a Dividend Yield, expressed as a percentage. The Dividend offered to Shareholders can vary, while Dividends on Preferred Stock is a prescribed amount. If the Dividend on a Preferred Stock is not paid, it will accumulate and take precedence over dividends paid on Common Stock. Dividends are paid Semi Annually or Annually. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 13
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 6. CHAIRMAN/ CHAIRWOMAN The Chairman of the Board is the highest-ranking officer of the board of directors in a corporation. The role of the Chairman of the Board is to preside over and lead board meetings, ensure that the board's objectives and goals are being met, and facilitate effective communication and collaboration among board members. The Chairman of the Board is responsible for setting the agenda for board meetings, ensuring that all directors have access to necessary information and resources, and ensuring that the board's decisions are in the best interest of the company and its stakeholders. In this role the Chairman is also responsible for providing guidance and support to the CEO and senior management team, and for representing the company to external stakeholders, such as shareholders, regulators, and the media. The Chairman may also be responsible for establishing and maintaining relationships with key investors and stakeholders, and for overseeing the development and implementation of the company's strategic plan. In some cases, the Chairman of the Board may also serve as the CEO of the company, in which case their responsibilities would also include managing the day-to-day operations of the business and executing the strategic plan. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 14
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture One: Administration 7. CHIEF EXECUTIVE OFFICER (CEO) The Chief Executive Officer (CEO) is the highest-ranking executive in a corporation. The role of the CEO is to provide leadership and direction to the company's management team, and to ensure that the company's overall strategy and objectives are being met. The day-to-day management of the operations of a company is the responsibility of the CEO. The CEO makes key decisions regarding the allocation of resources, the development of new products and services, and the management of the company's finances. Ultimately the CEO is also responsible for building and maintaining relationships with key stakeholders. This includes customers, investors, regulators, and for representing the company to the public and the media. The CEO works closely with the Board of Directors to ensure that the company is operating in accordance with its values, mission, and strategic goals. The CEO must provide regular updates on the company's financial performance and other key metrics. The CEO also works closely with the company's executive team to develop and implement strategies for growth and expansion, and to ensure that the company is staying ahead of market trends and technological advancements. Finally, the CEO is responsible for creating a culture of innovation, excellence, and accountability within the company, and for ensuring that all employees are aligned with the company's values and objectives. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 15
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 1. TOTAL ASSETS Total Asset is an accounting definition, being one of the two dominate Balance Sheet classifications, the other is Total Liabilities. Total Assets is what the company owns and is divided into Current Assets and Non-Current Asset or Long-Term Assets. The division is based on liquidity, or perceived liquidity, of the asset. The concept is that Current Assets could be turned in Cash in under one year. Non-Current Assets, while they could be liquified, are assets that will be maintained on the Balance Sheet for more than one year and include assets involved in the production process, such as Plant and Equipment. Balance Sheet items which will be classified as assets include but not limited to Fixed Assets, Intangible Assets, Cash, Marketable Securities, Accounts Receivable and Inventory. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 16
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 2. TOTAL LIABILITIES As the Balance Sheet must balance, Total Liabilities must equal Total Assets. Total Liabilities is an accounting term, defining one of the two main Balance Sheet classifications. Total Liabilities is the sum of Current Liabilities and Long-Term Debt and other Long-Term Liabilities plus Shareholder's Equity. Keep in mind Shareholder's Capital is also what the company owes to Shareholders, it is a Liability. Total Liabilities are often broadly separated into Liabilities or Creditors and Shareholders Equity. The key concept to keep in mind, Shareholders are rewarded for accepting the Business Risk of a Company they own. Creditors are taking the Financial Risk in dealing with the Company. Creditors are in a senior position compared to Shareholders. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 17
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 3. SHAREHOLDERS EQUITY Shareholders Equity is a Balance Sheet entry under Liabilities, in the end the Company owes this money to Shareholders. Total Shareholders’ Equity is equal to Total Assets less Liabilities. Shareholders' Equity is comprised of several different entries including Shares Outstanding, Additional paid-in Capital, Retained Earnings and Treasury Stock. As the case for other Balance Sheet entities Shareholders Equity is also known under a couple of different names, Net Worth, Book Value. In the end Shareholders' Equity represents the ownership of the Company by Shareholders and is one of the key components of the Leverage Calculations. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 18
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 4. CURRENT LIABILITIES Current liabilities on the balance sheet are obligations that a company is expected to pay within one year or within the normal operating cycle of the business, whichever is longer. These liabilities are considered to be short-term in nature and are typically paid off using current assets such as cash or accounts receivable. Some common examples of current liabilities include: Accounts payable: Amounts owed to suppliers for goods and services received but not yet paid for. Short-term loans: Borrowings that are due to be repaid within one year or the normal operating cycle, whichever is longer. Accrued expenses: Expenses that have been incurred but not yet paid, such as salaries, taxes, and interest. Current portion of long-term debt: The amount of long-term debt that is due to be repaid within one year or the normal operating cycle, whichever is longer. Unearned revenue: Payments received from customers for goods or services that have not yet been provided. Customer deposits: Funds received from customers as a deposit on future goods or services. Current portion of lease obligations: The amount of lease payments that are due within one year or the normal operating cycle, whichever is longer. These current liabilities are important to track because they represent the company's short-term financial obligations and can impact its liquidity and ability to meet its financial obligations. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 19
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 5. CURRENT ASSETS Current assets on the balance sheet are assets that a company expects to convert into cash or consume within one year or within the normal operating cycle of the business, whichever is longer. These assets are considered to be short-term in nature and are typically used to fund the company's daily operations. Some common examples of current assets include: • Cash and cash equivalents: Includes cash on hand, bank deposits, and short-term investments that can be easily converted into cash. • Accounts receivable: Amounts owed to the company by its customers for goods or services sold on credit. • Inventory: The value of the goods or products that the company has on hand and available for sale. • Prepaid expenses: Payments made in advance for expenses such as rent, insurance, and taxes. • Marketable securities: Short-term investments in stocks, bonds, or other securities that can be easily sold to generate cash. • Other current assets: Includes any other assets that the company expects to convert into cash or consume within one year, such as prepaid royalties, advances to suppliers, or deposits. These current assets are important to track because they represent the company's short-term resources that can be used to fund its daily operations and meet its financial obligations. They can also provide insight into the company's liquidity and ability to generate cash flow. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 20
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 6. LONG TERM ASSETS Long-term assets are those that a corporation expects to keep for more than a year and are not intended to be sold in the normal course of business. These assets are often employed to produce revenue or to provide the organization with other long-term benefits. Long-term assets include the following: • Buildings, land, machinery, and cars are examples of tangible assets that a corporation owns and utilizes to produce revenue. • Patents, trademarks, copyrights, and goodwill are examples of intangible assets that a firm owns and utilizes to produce revenue. • Investments are long-term investments in other companies made by a company, such as stocks, bonds, and mutual funds. • Deferred Charges, which are expenses, paid in advance by a business, such as prepaid rent, insurance premiums, and deferred taxes. • Other Long-Term Assets are long-term receivables or loans to other companies. • On the balance sheet, long-term assets are reported at their original cost, less any accumulated depreciation or amortization. Depreciation and amortization are accounting methods used to spread the cost of long-term assets across their useful lifespan, reflecting the continuous wear and tear and loss of value Long-term assets are a key aspect of a company's long-term growth and success since they allow the organization to produce income and achieve its strategic goals over time. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 21
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Two: Balance Sheet 7. LONG TERM DEBT The Long-Term liabilities section on the balance sheet lists the debts and obligations that the company owes to third party. The obligations extend for more than one year. Long-Term liabilities are debts and obligations that are due to be paid over a period of more than one year. Of course, there could be amortisation and interest payments required within the current FY. Long-Term liabilities include loans, bonds, and leases. On a balance sheet, long-term liabilities are listed separately from current liabilities, which are due to be paid within one year. It is important to note that long-term liabilities are not the same as equity, which represents the residual interest in the assets of the company after liabilities have been paid. A company’s balance sheet provides investors and analysts with a better understanding of the company's financial health and assess its ability to pay its debts and meet its financial obligations. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 22
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 1. REVENUE Revenue or sales is the top line of the Profit and Loss (P&L) statement, which is also known as the income statement. The P&L statement is a financial statement. It shows a company's revenues, expenses, and net income or loss for a specific period of time. The period of time could be a month, quarter, or year. The top line of the P&L statement shows the company's total revenue or sales for that period. This is before any deductions or expenses are taken into account. Revenue represents the income that a company generates from its primary business activities. This is the sale of goods or services. It is the starting point for calculating a company's gross profit (GOP). The GOP is calculated by subtracting the cost of goods sold (COGS) from revenue. Gross profit represents the profit earned from the company's core operations. This is before taking into account other operating expenses. Revenue can be broken down by product or service category, geographic region, or customer segment. This will depend on a company's reporting and analysis needs. By analyzing revenue trends over time and by category, a company can gain insights into its market performance. This will give an understanding of customer preferences, and product or service mix. Revenue growth is often used as a key performance indicator (KPI). This will measure a company's financial health and growth potential. It's important to note that revenue may not represent the actual cash received by the company. It may include sales that have not yet been collected as accounts receivable. Additionally, revenue recognition principles and accounting standards can have an impact. The profit and loss impact will be the timing and amount of revenue recognized in the P&L statement. This can affect the accuracy of revenue or sales figures. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 23
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 2. GROSS OPERATING PROFIT Gross Operating Profit (GOP), is the profit earned by a company from core operations. This is before deducting operating expenses. It is calculated by subtracting the cost of goods sold (COGS) from the company's revenue or sales. This is the gross profit earned by the company from its primary business activities. The GOP provides insight into the profitability of a company's core operations. In the GOP calculation, other expenses salaries, rent, and marketing expenses are not taken into account. Used to evaluate a company's ability to generate profits. This will be the profits from its primary business activities. Also used to compare the profitability of different product lines or business units. The GOP can be expressed as a percentage of revenue or sales, known as gross margin. Gross margin is calculated by dividing GOP by revenue or sales and multiplying by 100. Gross margin is often used as a KPI to measure. This will be for a company's profitability and efficiency in managing its cost of goods sold. The GOP does not take into account other expenses that are necessary for running a business. Such as salaries, rent, and marketing expenses. Therefore, it should be used in conjunction with other financial metrics. Other metrics such as net income, operating income, and EBITDA. This will give a complete picture of a company's financial health and profitability. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 24
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 3. EBITDA EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. The EBITDA is calculated from a Company’s Profit & Loss. Focused on the Cash Earnings before Interest Expense and Taxes. Thus, EBITDA measures a Company's Operating Cash Flow before deducting the non-cash items. These include Depreciation and Amortisation. EBITDA is calculated by the formula. EBITDA = Sales - Op Expenses + Depreciation + Amortisation Non- Cash items of Depreciation and Amortisation are added back. Thus, the EBITDA figure is focusing on the Operating Cash Flow. Like the EBIT figure, lower in the Profit and Loss. The EBITDA figure excludes the impact of leverage, interest rates and tax. The EBITDA figure is a useful guide for intra-sectoral valuations. The Ratios could be, EBITDA / Sales, a margin expressed as a percent. or EV / EBITDA, a multiple. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 25
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 4. EBIT This measures a company's operating performance and is calculated by the formula: EBIT = Total Sales - COGS - Operating Expenses Thus, the EBIT result depends on the Sales result. This is product pricing x volume and cost efficiency. EBIT looks at a company's operating performance. Without the impact of the Capital Structure or Leverage, Interest Expense and Taxes. A Company’s Market Capitalisation plus Net Debt known as Enterprise Value (EV), can be divided by EBIT. The Multiple can give an estimate of a company’s intra-sectoral efficiency. Or how much EBIT is produced by EV. The formula is. EBIT Multiple = EV / EBIT A comparatively high ratio will indicate that the EBIT generated is low based on the capital employed. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 26
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 5. NET EARNINGS Net Earnings is what the company has produced after all expenses have been deducted from Sales. Used to calculate the EPS and the PE Ratio. Then either held as Retained Earnings or paid as a Dividend. At the end of an Accounting Period, a company reports its Net Earning or Net Income, the last line in the Profit and Loss. To arrive at the Earnings figure, from Sales all the different expenses categories are deducted. This includes Cost of Goods Sold, General and Administrative Expenses. Also, Operating Expenses, Depreciation and Amortisation, Interest Expense and Taxes. Net Earnings is then used to pay a Dividend. The remainder is transferred to Shareholders Funds as Retained Earnings. The Net Earning number is the basis for calculating Earnings per Share (EPS). EPS calculated by dividing the Earnings number by the Number of Shares. Earnings is the critical number on the Profit and Loss. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 27
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 6. FREE CASH FLOW Free Cash Flow (FCF) is an important number to consider. FCF determines the cash flow available to pay the Company's financial stakeholders. FCF is the total cash flow generated by a company from normal operations. The calculation takes Retained Earnings, adjusting for non-cash expenses in the Profit and Loss. They are Depreciation and Amortisation and the Balance Sheet items of changes in Working Capital and CAPEX. Free Cash Flow is the cash a company has available to pay or fund the obligations. Obligations can be real or expected, of the two financial stakeholders in a Company. They are, Debtors in repaying and servicing Debt obligations. Then to pay Dividends to Shareholders an expected obligation. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 28
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Three: Profit and Loss 7. DEPRECIATION AMORTISATION Depreciation is an accounting charge used to decrease the value or depreciate the value of a productive asset. For example, a computer purchased FY0 will have its value depreciated over a period of time to zero in FYX. In accounting terms, this indicates an end to its value to the company, or obsolescence. Depreciation is a non-cash charge, and an adjustment is made in the Cash Flow Statement. This reflects the non-movement in Cash Flow over the FY. Amortisation is a non-cash expense taken against the Profit and Loss. This is for the reduction in the Balance Sheet Valuation of intangible assets. Amortisation is an expense used in the preparation of the annual financial statements. It is a non-cash item as there is no cash payment. As amortisation is recognised as an expense, it reduces the taxable income of a company. It does not impact the company’s cash position. An adjustment is made in preparing the Cash Flow Statement. The purpose is to recognise the decreasing value of an intangible asset. It has the effect of reducing the value of the intangible asset on the balance sheet. An amortisation schedule will conform to GAAP or IFRS Accounting Standards. An intangible asset, an asset that cannot be touched. For example, Goodwill, Intellectual Property, Patents, Copyrights and Trademarks. When applied to an asset, amortisation is similar to the depreciation of a fixed asset. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 29
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 1. RETURN ON ASSETS (ROA) ROA is calculated by taking Net Income / Average Total Assets and is expressed as a percent. Useful for comparisons between Companies in similar Sectors. Return on Assets (ROA) is an easy financial ratio to calculate, similar to ROE. Employed to indicate the efficient use of Total Assets employed over the Financial Year by the level of return or Net Income generated. ROA is expressed as a percent, calculated by the following formula. ROA = Net Income / [(Total Assets TY-1 + Total Asset FY0)/2] The correct name is the Return on Average Assets (ROAA). Thus, combining a P&L entry, the Net Income and an average Balance Sheet entry for Total Assets over the just completed FY. ROA is not a Valuation Ratio and is not used to estimate a Price Target for the listed Share Price. Instead, ROA is a useful measure for Inter Sectorial comparisons by Management and Investors. They are able to evaluate how efficiently the Assets of a Company are being employed to generate Net Income. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 30
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 2. RETURN ON EQUITY (ROE) ROE is calculated by taking Net Income / Shareholders Equity and is expressed as a percent. Useful for comparisons between Companies. Like ROA, ROE is an easy to calculate financial ratio that indicates the level of profitability generated by the level of Shareholder’s Funds employed. Expressed as a percent is calculated by the formula. ROE = Net Income / Shareholder’s Funds ROE is not a Valuation Ratio, thus not used to place a Target Price. In evaluating ROE, the Leverage Ratio should be taken into consideration. When using ROE for comparative analysis, a higher leveraged company could have a higher ROE. But excessive leverage could put Shareholder’s Capital at greater risk of default. ROE measures a Company’s profitability used by both Management and Investors, useful for Inter Sectorial comparisons. A higher ROE is better if the level of Debt is manageable. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 31
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 3. INTEREST COVERAGE Interest coverage is a financial ratio, based on operating income. The ratio calculates a company's ability to pay the interest expense on outstanding debt. It is a critical financial parameter used by lenders and investors. Interest coverage helps evaluate a company's financial health and creditworthiness. Earnings before interest and taxes (EBIT) is divided by its interest expense to get the interest coverage ratio. The interest coverage ratio is calculated by the following formula: Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense For example, if a company has an EBIT of $1,000,000 and an interest expense of $100,000, its interest coverage ratio would be: Interest Coverage Ratio = $1,000,000 / $100,000 = 10 A higher interest coverage ratio indicates that a company can fulfill its debt obligations more effectively with its operational income. A ratio of 2 or higher is considered healthy, suggesting that the company earns enough income at the operating level to cover its interest payments. Different industries and companies may have different acceptable ranges for the interest coverage ratio. It is critical to compare a company's interest coverage ratio to industry averages and benchmarks. A low interest coverage ratio may indicate that a company is at risk of not meeting its debt obligations. The operating income is insufficient or close to insufficient to service the debt. Lenders and investors frequently see a low interest coverage ratio as a warning flag since it may suggest that a company is financially troubled or overleveraged. The interest coverage ratio is an important indication that displays a company's ability to manage its debt obligations while also generating enough operating revenue to support its growth and expansion plans. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 32
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 4. CURRENT RATIO The Current Ratio calculates a company's ability to pay short-term liabilities with short-term assets. It is a measure of a company's liquidity, or its capacity to turn assets into cash in order to satisfy its financial commitments as they become due. Another ratio is the Quick Ratio. It is considered to be more accurate, focusing on cash and equivalents. Divide a company's current assets by its current liabilities to get the Current Ratio. Current assets include cash and cash equivalents, accounts receivable, inventories, and short-term investments that can be quickly turned into cash within a year. Debts due within a year, such as accounts payable, short-term loans, and accumulated expenses, are examples of current liabilities. The formula for calculating the Current Ratio is: Current Ratio = Current Assets ÷ Current Liabilities For example, if a company has $500,000 in current assets and $250,000 in current liabilities, its current ratio would be: Current Ratio = $500,000 ÷ $250,000 = 2.0 A current ratio of 2.0 indicates that the corporation has $2.00 worth of current assets for every $1.00 worth of current liabilities. A greater current ratio suggests that a company is better capable of meeting its short-term obligations. A lower current ratio suggests that a company may struggle to meet its short-term obligations. The current ratio should not be studied in isolation. Rather in connection with other financial ratios and aspects affecting a company's financial health, such as cash flow, profitability, and debt levels. It's also worth noting that different industries may have varying acceptable current ratio ranges, so compare a company's current ratio to industry averages and benchmarks. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 33
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 5. TOTAL DEBT-TO-EQUITY RATIO Total Debt-to-Equity is a Leverage Ratio that uses inputs only from the Liability side of the Balance Sheet. Calculates the level of Shareholder’s resources used in financing the Balance Sheet A Financial Ratio such as the Total Debt-to-Equity Ratio is a Leverage Ratio, thus a Risk Ratio. The Ratio measures the level of Gearing a Company is using to finance the Company’s Total Assets. Thus, how a Company’s capital structure is tilted either toward either Debt or Equity and is calculated by the following formular. Total Debt-to-Equity Ratio = [(Total Debt + Fixed Payment Liabilities) / Shareholders’ Equity] A Company’s reliance on Debt Financing will fluctuate over time as will, the changing reliance between Short-Term and Long-Term Debt and Payments. Further, the level of Gearing employed will vary between Companies which are competitors in the same Sector. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 34
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 6. ENTERPRISE VALUE A Company’s Enterprise Value (EV) calculates the market value of Total Capital employed. Total Net Debt is added to Market Capitalisation, as quoted on the Stock Market. The concept of a Company’s Enterprise Value (EV) does not distinguish between Debt and Equity. EV looks at the Total Market Value of Capital employed, in productive assets. The Company’s Market Cap is added to Debt, assets such cash and cash equivalents are non- productive assets and deducted to have a Net Debt figure. EV could answer the question, “how much capital would be required to run this company” or possibly “how much would it cost to Buy this company”. Then the objective would be to determine the most cost-efficient capital structure, the cost of capital via the WACC calculation. Enterprise Value, can substitute for Stock Price as the numerator for a series of EV ratios including EV to Sales, EV to EBITDA, EV to Net Earnings and used to measure a Company's operating performance. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 35
INVESTING IN STOCKS: A BEGINNERS GUIDE Module One: ACCOUNTING Lecture Four: Financial Ratios 7. BOOK VALUE Book Value is equal to Total Assets minus Liabilities. Book Value per Share can be used to value a company in the very early stages of development using the ratio, Price / BPS. The company’s Shareholder's Capital is the Book Value which can be expressed on a per share basis. The Book Value of a Company is calculated by subtracting the Liabilities net of Shareholder's Capital from Total Assets in the Balance Sheet. The Book Value can then be divided by the weighted average number of shares outstanding to have the value on a per Share Basis, known as BPS. The Book Value is a Balance Sheet valuation as compared to other per share items such as EPS from the P&L. Book Value per Share can be used in a Price Ratio Formula = Price / BPS. BPS is less used in valuing a Company, the exception is when a Company is in the very early stage of development with no Sales thus no earnings. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 36
Module Two: ECONOMICS Lecture One: Economics Lecture Two: Leading Indicators WARREN WILLIAM WWW.SMARTEST-DATA.COURSES
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 1. MACRO ENVIRONMENT When reference is made to the Macro Environment, or current Macro Environment this refers to the set of conditions that could impact the general business cycle. The macroeconomic environment refers to the overall state of the economy, including the level of economic activity, the level of employment, the level of prices (inflation), and the level of international trade. This can also include factors such as the level of government spending, the level of taxes, and the level of monetary policy being the level of interest rates. Thus, closely associated with Macroeconomic data GDP trends, inflationary pressures, consumer confidence and employment dynamics. Indicates the likely impact on business decisions such as capital expenditures and employment. It's important to note that macroeconomics is not the same as microeconomics, which refers to the specific market conditions facing an individual business or industry. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 38
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 2. MACROECONOMICS Macroeconomics focuses on three fields, National Output, Employment. In Economics, Macroeconomics focuses on the trends in the Long-Term Economic Growth and the Short-Term influences impacting Business conditions and the overall the Business Cycle. The Macroeconomic factors impacting economic performance and the evolving structure of the broad economy focuses on three core fields, National Output, Employment Conditions and Price Stability being Inflation or Deflation. There are several Economic Data Series in each area that are studied, in National Output this includes growth in GDP and GNP, in Employment this includes Jobless Claims while in Price Stability this includes CPI and PPI. As an Economy evolves and passes through the various stages in the Economic Cycle, Macroeconomics attempt to address the key questions such change in direction or relative increasing or decreasing strength in the various Macroeconomic Data series. There are many questions that Macroeconomics endeavours to explain. Macroeconomics attempts to measure the relative performance of an Economy, both compared to its history and other similar benchmarks such as other similar national economies. The aim is to understand the driving forces and to project how best to manage the overall stability of an Economy. There are many questions that Macroeconomics endeavours to explain. Some of the more common questions include: Why is unemployment increasing or decreasing? What factors is driving inflation or deflation? How can Economic growth be stimulated or slowed? WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 39
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 3. MICROECONOMICS In Economics, there are three now probably a fourth resource, Land, Labour, Capital and now Technology Infrastructure to consider. Microeconomics provides an understanding of an Economy, the implications of incentives and ultimately the choices made about the utilisation and distribution of resources. The participants, individuals or companies, in an Economy demonstrate biases which occur when they make choices in response to incentives or changes in the offering. The incentives could be changes in prices or the availability of resources and improvements in production techniques. The various participants in an Economy, Buyers and Sellers are studied in Microeconomics, as they compete for resources or are in a competing supply and demand relationship of a resource. The economic tools of trade, money and the price of money, interest rates, become the conduit for barter, or more formally negotiation. Thus, Microeconomics looks at why the participants utilise different economic elements and place different values on these elements. Ultimately Microeconomics studies the choices made by individuals and companies to allocate resources of production, exchange, and consumption. Then how participants benefit from efficient production, exchange, coordination and cooperation in an Economy. In investing in Stocks, Microeconomics can assist in explaining the possible impact for an individual company. For example, if Employment Rights are legally changed, for example an increase in the Minimum Wage this could have a negative impact on some companies. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 40
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 4. ECONOMIC CYCLE An Economy passes through an Economic Cycle, from peak growth to trough, the transition phases and back to the peak. There are the various phases and characteristics of each phase for a complete Cycle. The relative strength or weakness in various Economic data points such as Unemployment, Consumer Confidence, Inflation, Industrial Production will characterise of each phase of the Economic Cycle. All of these data points assist in determining which is the current stage of the Economic Cycle. For example, rising Unemployment and falling Consumer Confidence would likely indicate the contraction phase in the cycle. Different stages of an Economic Cycle will be more beneficial to some companies compared to others. Understanding the phase and rate of either growth or contraction is key in Asset Allocation and which stocks to Buy, Hold or Sell. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 41
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 5. BALANCE OF PAYMENTS The Balance of Payments is often quoted to indicate the level of international trade between two countries. It is comprised of the Current Account and the Capital Account. The Balance of Payments is an economic data series relating to international trade. The series is calculated by summarising all transactions that a country's individuals, companies and government entities make over a set time period, with another country. The Balance of Payments includes both the Current Account and the Capital Account. The Current Account is calculated by summarising the net trade in goods and services, plus net earnings on cross-border investments plus the net transfer payments. The Capital Account accounts for a country’s transactions in financial instruments and central bank reserves, with another country. The Balance of Payments summaries all transactions that a country or an economic block, for example the EU makes with either a country, such as Canada or another economic block or even the rest of the world. The Balance of Payments is mostly reported as the Quarterly Balance of Payments. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 42
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 6. MONETARY POLICY Monetary Policy can be either Accommodative, Neutral or Restrictive. When Monetary Policy is directed towards stimulating the Economy, to avoid a slowdown in economic growth. During periods in which the monetary policy of the Federal Reserve, or another Central Bank, is termed as an Accommodative Monetary Policy (Dovish) the objective is to stimulate economic activity. One method is to the increase the money supply in the economy by cutting interest rates. The desired effect is to increase the amount of money available for banks to lend to the broad economy, which should stimulate economic activity. The opposite to this is a Restrictive Monetary Policy (Hawkish) where Interest Rates are increased. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 43
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture One: Economics 7. YIELD CURVE The Yield Curve graphs the Government Bonds’ annualised yield to maturity, plotted on the Y-Axis. On the X-Axis is the term to maturity for these Bonds, issued by the same insurer under the same Credit Rating. To understand the Yield Curve, understand that the X-Axis (horizontal) plots Maturity and the Y-Axis (vertical) plots Yield. Or more accurately the annualised yield to maturity, which changes and brings the different shapes to the Yield Curve, Normal, Flat and Inverted. The graph sloping up from Left to Right is a Normal Yield Curve is representing the normal Term Structure of Interest Rates. The Yield Curve plots the Bonds issued by the same Issuer, for example the U.S. Government under its Credit Rating. The range of maturities plotted on the X-Axis extends from Short-Term under 2 Years, then 2 Year to 10 to 30 Year Long-Term Bonds. Then the different yields, are plotted on the Y-Axis and the yields are constantly changing driven by market forces. The domestic Yield Curve provides a benchmark rate for all other Debt instruments in the Economy. Thus, in the U.S. the Yield Curve for U.S. Treasuries will guide the pricing for all other Debt Securities or offerings such as Mortgage Bonds, Corporate Bonds, Variable Rate Mortgages and Bank Loans. The Yield Curve will be used to forecast changes in the Economic Cycle, from growth to the peak to slowdown to recession. The pricing of Home Loans is also determined by the Yield Curve, thus becomes an instrument to implement Monetary Policy and Mortgage repayments are a major outflow of the Household budget. Short-Term rates will be raised or lowered by the Central Bank, Variable Mortgage rates are priced at the Short-End of the Yield Curve. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 44
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture Two: Leading Indicators 1. LEADING INDICATORS Leading Economic Indicators are forward-looking indicators and are generally compiled by a Survey. Some Indicators are specifically for the Consumer Sector, for example the CCI and others for the Industrial Sectors, the PPI. The Leading Economic Indicators attempt to forecast any variable either qualitative or quantitative, that could assist is forecasting a change or movement in a hard Economic Data series, such as GDP. Thus, the Leading Indicators can give an idea of the direction in another data series before the hard data is available. They are very much forward looking and are generally compiled by a Survey Format, either directly or indirectly. The Key Leading Indicators deal with both the Consumer Sector and the Industrial Sector. For the Consumer this includes Consumer Confidence and Initial Jobless Claims and for the Industrial Sector this includes the Purchasing Managers' Index, Durable Goods Orders and Average Hours Worked. The Stock Market watches the Leading Indicators very closely. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 45
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture Two: Leading Indicators 2. INFLATION Inflation is measured at the Consumer and Industrial level. The CPI measures the price changes in a basket of goods and services. Industrial inflation measures the change of price of inputs into the production chain. The three types of Inflation are Demand-Pull, Cost-Push and Built-in Inflation. Inflation measures the changes in price for goods and services in an economy, expressed as a percentage. The most common inflation statistic referred to is the CPI which is focused on the change in prices of goods and services commonly used by the Consumer. The change in price of a basket of goods and services is measured and includes transport, pharmaceuticals, food and clothes, to name a few. Industrial inflation is also measured by the Producer Price Index, which measures the change of price of inputs into the production chain. A normal level of Inflation can be good for Stocks as it could give some pricing power. Rampant Inflation and rampant Deflation are disastrous for an economy. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 46
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture Two: Leading Indicators 3. UNEMPLOYMENT Unemployment refers to a person who is actively searching for employment. The Unemployment Rate, expressed as a percent divides the number of registered Unemployed by all Labour Market participants. Unemployment data is an important series to monitor when investing in the Stock Market. It is an important economic indicator as to where an economy is positioned in the Economic Cycle. A High Unemployment Rate could indicate an economy is approaching or already in a recession, low levels of Unemployment could signal constraints in the Labour Market and an economy which could be Overheating. The concept of Unemployment is easy to understand as it refers to a person who is actively searching for employment but is unable to find work. The most common measure used is the Unemployment Rate. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 47
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture Two: Leading Indicators 4. GROWTH Gross Domestic Product (GDP): GDP is one of the most commonly used indicators of economic growth. It measures the total value of goods and services produced in a country over a given period of time. An increase in GDP indicates that the economy is growing, while a decrease in GDP indicates that the economy is contracting. Growth or potential growth can be observed in several data series. Industrial production measures the output of the manufacturing, mining, and utility sectors of the economy. An increase in industrial production suggests that businesses are producing more goods, which can indicate economic growth. The consumer confidence index measures how optimistic consumers are about the economy. When consumer confidence is high, people tend to spend more money, which can boost economic growth. Retail sales measure the amount of money that consumers spend on goods and services at retail stores. An increase in retail sales can indicate that consumers are confident in the economy and are willing to spend more money, which can help drive economic growth. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 48
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture Two: Leading Indicators 5. NONFARM PAYROLLS U.S Nonfarm Payrolls is a leading economic indicator measuring changes, growth or contraction, in the non-seasonal U.S. Labour Market. In the U.S, the Nonfarm Payrolls, is an economic indicator issued monthly (1st Friday) by the Bureau of Labor Statistics. Changes in the Labour Market is one of the key Leading Economic Indicators. In measuring the changes in the Labour Market, the non-seasonality is the key focus. Therefore, the Nonfarm Payrolls specifically excludes Farm Workers, due to the seasonal nature, Government Employees to avoid manipulation, Household Staff and Non-Profit Organisations. The NFP covers around 80% of the Labour Market surveying the Private Sector and some Government entities regarding their current payrolls. It is a measure of the number of workers in the U.S. and NFP Report is closely monitored by Stock Investors. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 49
INVESTING IN STOCKS: A BEGINNERS GUIDE Module Two: ECONOMICS Lecture Two: Leading Indicators 6. CONSUMER PRICE INDEX (CPI) The Consumer Price Index is a key economic indicator, measuring inflation. Calculated by taking the change in the weighted average prices of a basket of consumer items. The Consumer Price Index (CPI) is an economic indicator designed to measure the cost of living in an economy. The CPI measures the change in the weighted average prices of a basket of consumer items, the Market Basket. The items have been chosen to reflect price changes in the cost of living. The Basket is a collection of consumer goods and services, covering consumer staples such as food and medicine and transport. The CPI is measured year on year and published on a regular basis, often monthly. In the U.S. the Bureau of Labor Statistics calculates the CPI, collecting data on 94,000 price quotes, covering 93% of the U.S. population. WARREN WILLIAM WWW.SMARTEST-DATA.COURSES # 50
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