Stock Trading Stock Trading Fundamental Analysis & Valuation 1 — Questions and Answers
Question 1: What does the Price-to-Earnings (P/E) ratio measure?
- How much investors pay per dollar of earnings (Correct answer)
- A company's total debt relative to equity
- The dividend yield of a stock
- A company's market cap vs. book value
Correct answer: How much investors pay per dollar of earnings
The P/E ratio divides share price by earnings per share, showing how much investors are willing to pay for each dollar of profit.
Question 2: Which financial statement shows a company's revenues and expenses over a period?
- Balance sheet
- Cash flow statement
- Income statement (Correct answer)
- Statement of retained earnings
Correct answer: Income statement
The income statement (profit and loss statement) reports a company's revenues, expenses, and net profit or loss over a specific period.
Question 3: What is EBITDA an acronym for?
- Earnings Before Interest, Taxes, Depreciation, and Amortization (Correct answer)
- Estimated Base Income Tax, Dividends, and Assets
- Equity Before Interest, Trading, Debt, and Assets
- Earnings Before Income Tax and Dividend Adjustment
Correct answer: Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, commonly used to assess operational profitability.
Question 4: What does a Price-to-Book (P/B) ratio below 1.0 typically indicate?
- The stock may be trading below its net asset value (Correct answer)
- The company has no debt
- The stock is overvalued
- The company has high earnings growth
Correct answer: The stock may be trading below its net asset value
A P/B ratio below 1.0 suggests the stock price is less than the company's book value per share, potentially indicating undervaluation.
Question 5: Which metric best represents the cash a company generates after capital expenditures?
- Net income
- Free cash flow (Correct answer)
- Gross profit
- Operating income
Correct answer: Free cash flow
Free cash flow equals operating cash flow minus capital expenditures, representing actual cash available for dividends, buybacks, or debt repayment.
Question 6: In fundamental analysis, what is the 'intrinsic value' of a stock?
- The stock's current market price
- The estimated true value based on financial analysis (Correct answer)
- The book value of company assets
- The average analyst price target
Correct answer: The estimated true value based on financial analysis
Intrinsic value is the calculated worth of a stock based on underlying fundamentals such as earnings, assets, and growth prospects, independent of market price.
Stock Trading Stock Trading Fundamental Analysis & Valuation 1
What does the Price-to-Earnings (P/E) ratio measure?