You are hired by a large hedge fund based in Ontario as an equity researcher and are
Question:
You are hired by a large hedge fund based in Ontario as an equity researcher and are assigned to a team that covers the consumer staples industry. As a rookie researcher, your boss asks you produce some analysis reports on some local small-cap stocks and make some recommendations. Among the list of stocks, Andrew Peller Limited caught your attention because you read that the company’s fundamentals have been decent and that the company recently announced an increase in dividend payment to its shareholders.
You asked your boss whether Andrew Peller could be a good starting point that fits the hedge fund’s investment vision. Your boss quickly scanned through the company’s financials and replied, “it looks like a company that has stable operations and pays its dividends, but our fund is really looking for those small-cap stocks that can have good growth potentials…… Also, this company only does alcoholic beverage products in Canada, seems like it can be risky too.”
Your boss continues,
“As a starting point, crunch some numbers and show me how the company has been doing over the last 3 years. In particular, please try to answer for yourself the following three questions.”
(1) How is the company’s financial performance over the last three fiscal years (i.e., FY2021, FY2020, FY2019)? Why has the company’s gross margin decreased in 2021, yet its EPS increased? (15 Marks)
(2) What do the relevant ratios tell you about the most recent balance sheet as well as any changes over time? Are there any ratios that we should be worried about? (15 Marks)
(3) What do the cash flow patterns of the company tell you? Is there evidence that the company is stable and growing and why? Is the company’s plan to increase dividends justified (hint: check the free cash flows to shareholders)? (15 Marks)