Unlocking Financial Statements - Day 5 (2012) by Jimmy Gentry

UnlockingFinancial Statements Day 5

Schedule for Week Day 1: Introduction to financial statements Day 2: Income statement Day 3: Balance sheet Day 4: Cash flows Day 5: Beyond the basics Understanding Financial Statements 2

Beyond the BasicsUnderstanding Financial Statements 3

Income Statement Sales or revenues Cost of goods sold Gross profit Sales, general and administrative Operating profit Other income/expenses Interest Income taxes Net income or profit Understanding Financial Statements 4

Other Income/Expenses Discontinued items Unusual/extraordinary items Changes in accounting principle Impairment charge Sale of investment Minority interest Understanding Financial Statements 5

Thinking Inside the Box  Revenues  Minus cost of goods sold  Equals gross profit  Minus operating expenses  Equals operating profit  Minus or plus other expenses/income  Minus or plus interest expenses/income  Minus income taxes  Net income Understanding Financial Statements 6

Earnings Per Share Basic earnings per share (Bloomberg) Diluted earnings per share (Wall Street Journal, fully diluted) Understanding Financial Statements 7

Balance Sheet It balances Assets = Liabilities + Shareholders’ Equity Understanding Financial Statements 8

Cash Flows From operations From investing From financing Understanding Financial Statements 9

Free Cash Flow Several ways to calculate it Companies create their own models Gross way to do it:  Cash from operating activities  Minus capital expenditures  Equals free cash flow Understanding Financial Statements 10

A Basic Look at the Numbers Look at changes in amounts year to year, especially revenues and expenses Look at numbers that are significantly larger or smaller than the previous period Look at the trend line for sales/revenues, operating income and net income. Calculate percentage change for each. Look at the trend for cash flow Look at the trend for free cash flow Tie the numbers to the footnotes Understanding Financial Statements 11

The Next Step Calculate percentage change year-to- year or over several years … Especially for large numbers that are significantly larger or smaller than the previous period … Especially for sales/revenues, operating income, net income, cash and free cash. Understanding Financial Statements 12

Common Size Identify trends Identify what causes changes in totals on financial statements Easier to compare percentages than raw numbers Easier to compare companies Easier to compare companies with industry averages Understanding Financial Statements 13

Common Size Analysis For Income Statement, divide all entries by revenue For Cash Flows, divide all entries by the total increase or decrease of cash inflows for the year (add cash from operating, investing and financing) Understanding Financial Statements 14

Comparable Statements Often have to restructure Income Statement to the in-the-box format we discussed Typical problems come from items we would consider Other Income/Expenses Understanding Financial Statements 15

Trends in Margins How have Cost of Goods Sold and Sales, General and Administrative changed? What does that mean for Gross Margins and Operating Margins? Value of using Basis Points Understanding Financial Statements 16

Ratio Analysis Takes your analysis to yet another level Finance types especially fond of ratios Understanding Financial Statements 17

Common Size, Ratios These techniques let you drill below the surface and start developing a more complete picture of the company’s performance  Strengths  Weaknesses  Strategic effectiveness Understanding Financial Statements 18

Presented by: James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas jgentry@ku.edu Understanding Financial Statements 19

Unlocking Financial Statements - Day 5 (2012) by Jimmy Gentry

by Reynolds Center for Business Journalism on May 18, 2012

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