Fundamental Analysis & Valuation Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fundamental Analysis & Valuation flashcards as text
Which financial statement item best indicates whether a company's reported earnings are being converted into actual cash?
Answer: Operating cash flow to net income ratio
The ratio of operating cash flow to net income (cash conversion) reveals earnings quality; ratios well below 1.0 may indicate aggressive accrual accounting.
When the yield curve inverts (short-term rates exceed long-term rates), fundamental analysts typically interpret this as a signal of:
Answer: Heightened recession risk in the near term
An inverted yield curve has historically been one of the most reliable leading indicators of an economic recession, typically occurring 6–18 months before a downturn.
In a precedent transactions analysis, multiples tend to be higher than comparable company multiples primarily because:
Answer: Acquirers pay a control premium to gain majority ownership
In M&A transactions, acquirers typically pay a control premium (often 20–40%) above the current market price to gain controlling interest, pushing multiples higher.
A company reports rising revenue but declining operating cash flow over three consecutive quarters. This pattern most likely signals:
Answer: Potential earnings manipulation through aggressive revenue recognition
Revenue growing while operating cash flow falls is a classic red flag suggesting revenue may be recognized prematurely or receivables are ballooning, indicating potential earnings quality issues.
The Gordon Growth Model (Dividend Discount Model) is most appropriate for valuing which type of company?
Answer: Mature companies paying stable, predictable dividends
The Gordon Growth Model assumes dividends grow at a constant rate forever, making it best suited to stable, dividend-paying companies like utilities and mature blue chips.
Which ratio measures how many years of current earnings it would take to pay off a company's net debt?
Answer: Net debt / EBITDA
Net Debt/EBITDA indicates how many years of operating earnings (before non-cash items) would be required to repay net debt, a key leverage metric used by credit analysts.
A retailer's inventory turnover drops from 8x to 5x year-over-year. What is the most likely implication?
Answer: The company may be experiencing weakening demand or overstocking
A falling inventory turnover ratio means inventory is sitting longer before being sold, potentially signaling softer demand, product obsolescence, or poor inventory management.