CSC Fundamental and Technical Analysis 3 — Questions and Answers
Question 1: Which financial statement would an analyst primarily use to assess a company's liquidity position?
- Income statement
- Balance sheet (Correct answer)
- Statement of retained earnings
- Auditor's report
Correct answer: Balance sheet
The balance sheet shows current assets and current liabilities, which are used to calculate liquidity ratios like the current and quick ratios.
Question 2: Relative Strength Index (RSI) values above 70 typically signal a stock is:
- Undervalued and due for a rally
- Overbought and potentially due for a pullback (Correct answer)
- In a long-term uptrend
- Experiencing a volume surge
Correct answer: Overbought and potentially due for a pullback
An RSI above 70 indicates overbought conditions, suggesting the security may be overvalued and due for a price correction.
Question 3: The price-to-book (P/B) ratio compares a stock's market price to its:
- Annual earnings per share
- Net asset value per share (Correct answer)
- Free cash flow per share
- Dividend yield
Correct answer: Net asset value per share
P/B ratio divides market price per share by book value per share (total equity divided by shares outstanding), showing how much investors pay per dollar of net assets.
Question 4: A 'head and shoulders' pattern in technical analysis signals a potential:
- Continuation of the current uptrend
- Reversal from an uptrend to a downtrend (Correct answer)
- Period of low volatility
- Breakout to new highs
Correct answer: Reversal from an uptrend to a downtrend
The head and shoulders pattern is a bearish reversal formation with three peaks where the middle peak is the highest, signaling the uptrend is ending.
Question 5: Free cash flow is best defined as:
- Net income plus depreciation
- Operating cash flow minus capital expenditures (Correct answer)
- Total revenue minus total expenses
- EBITDA minus interest expense
Correct answer: Operating cash flow minus capital expenditures
Free cash flow = Operating Cash Flow − Capital Expenditures, representing cash available after maintaining and expanding the asset base.
Question 6: In the context of Dow Theory, a 'secondary trend' typically lasts:
- Less than one day
- Three weeks to three months (Correct answer)
- One to several years
- Exactly six months
Correct answer: Three weeks to three months
Secondary trends in Dow Theory are shorter-term counter-movements lasting three weeks to three months within the primary trend.
Question 7: When a company's EV/EBITDA multiple is significantly lower than its industry peers, it may suggest the stock is:
- Overvalued relative to peers
- Potentially undervalued relative to peers (Correct answer)
- Generating excessive debt
- Paying too high a dividend
Correct answer: Potentially undervalued relative to peers
A lower EV/EBITDA multiple than peers suggests investors are paying less for each dollar of operating earnings, potentially indicating undervaluation.
CSC Fundamental and Technical Analysis 3
Which financial statement would an analyst primarily use to assess a company's liquidity position?