There are two main stock exchanges in the United States. They are the New York Stock Exchange and the National Association for Securities Dealers Automated Quotations. Both allow companies to trade stocks on their platforms but they have several major differences. These are:
The NYSE is much older than the NASDAQ having been founded in 1792. The exchange was the brainchild of 24 brokers who sat down and crafted the Buttonwood Agreement. The NASDAQ on its part is a recent creation having been formed in 1971 (Briston, 2017). The NYSE’s longevity means that its structure is different by necessity.
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Quite crucially, the two entities also allow trading in two completely different ways. The NYSE is an auction house. The buyers and sellers find a willing counterpart and the shares go to the highest bidder at that moment. For that reason, and many others, the trading is usually does physically on the floor of the exchange (Briston, 2017). The specialists on the floor run the actual operations. The NASDAQ is defined as a dealers’ market. A dealer, known as a “market maker”, works to create a market for the securities. Both buyer and seller then has to deal with the market maker to conduct a trade.
It is also a tradition that companies listed on the two exchanges have different qualities. Firms listed on the NASDAQ are usually technology oriented and not as highly capitalized as those in the NYSE. The NASDAQ is still a growth market as firms there are usually still on their way up (Briston, 2017). The NYSE on its part mostly attracts stocks which have gained stability due to their longevity in the market.
For many reasons, the NASDAQ is usually much more volatile than the NYSE. It does require investors with an appetite for risk.
The free cash flow position can tell an investor quite a lot about a company. The following is an analysis of Facebook (NASDAQ) and Bank of America (NYSE).
Facebook indicates that it has had what one would consider a normal free cash flow situation especially in 2013-2014. During the first financial quarter of 2013, the company reported a free cash flow of $392 million. The number jumped to $1.054 billion in the second quarter. The number is the highest in the financial year and there might be good reasons for that. The most probable is that Facebook did not make any major capital investments during the period. When a firm makes a capital investment, the calculations are accounted for all at once instead of being spread out (Brigham & Houston, 2012). Therefore, there is a significant increase in the FCF whenever a firm retains much of its cash instead of making massive investments. The indication is that Facebook did not make any massive investments in the second quarter. The rest of the financial year remained relatively stable with the 3 rd quarter reporting $666 million and the final quarter a relatively comfortable $748 million.
Bank of America on its part has what one would consider a “normal” curve for the calendar year. The company reported an FCF of $26.47 billion as of March 2013. The number increased by almost $20 billion to $46.03 billion. The company appears to have increased its earnings by a large margin in that quarter or kept its investments to the absolute minimum. The FCF falls to a worrying $7 billion as reported in September 2013. The indication is that the company made large investments in that particular quarter. There is no information to indicate that earnings were impacted during this period. The FCF remained low in the following quarter at $12 billion. The company appears to have made significant investments in that period.
Facebook looked quite healthy in both 2016 and 2017 if one goes by the financial rations. For example, the company had a current ratio (CR = current assets/current liabilities) of
CR = 48,563/3760 = 12.916
in 2017 and a quick ratio (QR= cash-in-hand/current liabilities)
QR = 41,711/3760 = 11.093
. The import is that it could comfortably pay off its current liabilities if any of them came due. The firm was quite liquid in both years. The net profit margin for 2017 was
Net profit margin = net income/total revenue
NPM = 15,934/40,653*100 = 39.16%.
The most critical aspect of both numbers is the jump in profitability. The return on assets for 2017 was 18.85 while for 2016 was 15.73.
Asset management ratios also looked healthy. Net fixed asset turnover was at 2.96 while total asset turnover was at 0.48.
Strengths and Weaknesses
Looking at the ratios shows that Facebook’s main strengths are its liquidity, profitability, and judicious use of assets. The company remained liquid enough to handle emerging exigencies while making efficient use of its assets.
Bank of America on its part had a current ratio of
Current ratio = current assets/current liabilities
CR = 1,798,984,000/1,600,263,000 = 1.124
And a quick ratio of
Quick ratio = cash and equivalents/current assets
QR = 157,434,000/1,600,263,000 = 0.098
The net profit margin for BoA in 2017 was
Net profit margin = net income/revenue * 100
NPM = 18,232/87,352 * 100 = 20.87
Finally, the company registered a disappointing return on assets ratio of
Return on assets = net income/total assets
RoA = 18,232,000/2,281,234,000 = 0.00799
in 2017. The company also had an assent turover rate of exactly 0.00 at the end of the last financial year.
Strengths and Weaknesses
Bank of America’s appears quite adept at maintaining a healthy debt to equity ratio. The bank appears well leveraged with the management communicating caution. However, it is worrying that the firm makes such poor use of its assets. In both years the assets appear to be adding no discernible value to the income statement.
References
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management . Cengage Learning.
Briston, R. J. (2017). The stock exchange and investment analysis . Routledge.
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-reportsannual
https://investor.fb.com/financials/?section=annualreports
