Understanding Financial Statements
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Understanding Financial Statements

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    Understanding Financial Statements Understanding Financial Statements Presentation Transcript

    • INVESTMENT BASICS: Understanding Financial Statements INVESTMENT BASICS: Understanding Financial Statements September 1, 2004 SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Understanding Financial Statements Understanding Financial Statements Five Principles of Successful Stock Investing: • Do your homework* • Find companies with strong competitive advantages* • Have a margin of safety • Hold for the long term • Know when to sell * (Pat Dorsey – Morningstar) * KEY – Understand the business your are investing in. SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Understanding Financial Statements Understanding Financial Statements Understanding financial statements is critical to obtaining an understanding of the business you are considering investing in. The questions you should be able to answer include: • How does the company turn your investment into cash? •How has the company performed over the past, say, five years? •How has the company performed relative to its competitors? •Does the company have a competitive advantage? •What is the strategy for prolonging that advantage? SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Understanding Financial Statements Understanding Financial Statements Tap all possible information sources about the company: •Company’s annual report – read cover to cover •The media •Analysts assessments •Pose questions to Management/CFO But invest most time in published financials statements. If you don’t have the time to learn all you should about the company, consider Mutual Funds. SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Financial Statement Basics Understanding Financial Statements You should primarily be concerned with three key statements: BALANCE SHEET: The company’s “credit report” – tells you how much the company owns (assets) relative to what it owes (liabilities) [A snapshot]. INCOME STATEMENT: Tells you how much the company made or lost in accounting profit [in a reporting period]. CASHFLOWS: Records cash into and out of the company - ties balance sheet and income statement together SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: The Balance Sheet Understanding Financial Statements Techy Sales Inc. Balance Sheet $ $ As at Decenber 31st, 200X. 2003 2002 Current Assets Cash and cash equivalents 17,980 9,401 Tax recoverable 0 18,312 Accounts receivable 255,724 267,659 Prepayments 75,810 60,494 Inventories 3,357,379 3,189,323 3,706,892 3,545,189 Current Liabilities Bank overdraft 1,900,983 1,345,621 Accounts payable and accrued liabilities 659,460 1,185,279 VAT Payable 37,296 46,519 Corporation Tax Payable 123 123 Current portion of Long Term Loans Payable 121,772 120,012 2,719,633 2,697,552 Working Capital 987,259 847,637 SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: The Balance Sheet, continued Understanding Financial Statements Fixed Assets 667,776 624,428 Other Asset 0 18,029 Due from Affiliates 342,167 309,922 Long Term Loans Payable -380,510 -427,084 Shareholders' Loans -1,072,554 -964,054 Net Assets 544,138 408,877 Shareholders' Equity Stated capital 175,000 175,000 Retained earnings 369,138 233,877 544,138 408,877 SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: The Income Statement Understanding Financial Statements Techy Sales Inc. Statement of Income $ $ For the year ended December 31, 200X 2003 2002 Revenue Sales 10,537,188 10,156,535 Cost of Goods Sold 5,973,527 6,169,324 Gross Profit 4,563,661 3,987,211 Other revenue - Gain on disposal of fixed assets 0 31,500 4,563,661 4,018,711 Less Selling, General and Administrative Expenses 4,428,400 4,006,422 Net Profit Before Corporation Tax 135,261 12,289 Corporation tax 0 0 Net Profit for the Year 135,261 12,289 The following expenses have been included in the foregoing: Depreciation 211,012 182,112 Interest 198,611 188,741 409,623 370,853 SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Statement of Cash Flows Understanding Financial Statements Techy Sales Inc. Statement of Cash Flows $ $ For the year ended December 31, 200X 2003 2002 Cash Flows from Operating Activities Net profit before corporation tax 135,261 12,289 Adjustments for: Gain on disposal of fixed assets 0 -31,500 Depreciation 211,012 182,112 Interest expense 198,611 188,741 Operating profit before working capital changes 544,884 351,642 Decrease in accounts receivable 11,935 76,146 Increase in prepaid expenses -15,316 -40,485 Increase in inventories -168,056 -583,286 Decrease/(Increase) in Other receivables - Deposits 18,029 -18,029 (Decrease)/Increase in accounts payable -525,819 357,494 (Decrease)/Increase in VAT payable -9,223 10,084 Cash generated from operations -143,567 153,566 Corporation Taxes Recovered 18,312 0 Corporation Taxes Paid 0 -20,199 Net cash from operating activities -125,255 133,368 SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Statement of Cash Flows, continued Understanding Financial Statements Cash Flows from Investing Activities Proceeds from sale of fixed assets 0 31,500 Purchase of fixed assets -254,359 -64,320 -254,359 -32,820 Cash Flows from Financing Activities (Decrease)/Increase in Long Term Loan -44,814 255,406 Interest paid -198,611 -188,741 Increase in Due from Affiliate -32,246 -149,023 Increase/(Decrease) in Shareholders' loans 108,500 -70,000 -167,171 -152,359 Decrease in Cash and Cash Equivalents for the year -546,784 -51,811 Cash and Cash Equivalents - beginning of year -1,336,220 -1,284,409 Cash and Cash Equivalents - end of year -1,883,004 -1,336,220 Cash and Cash Equivalents Cash on hand 17,980 9,401 Bank Overdraft -1,900,983 -1,345,621 -1,883,004 -1,336,220 SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Income Statement vs Cash Flows Understanding Financial Statements The income and cash flow statements can tell different stories about a business because they are constructed using a different set of rules: I/S - Attempts to match revenues and expenses as closely as possible C/F - Focus on cash movement in and out of business regardless of timing of actions that generated the cash To get a complete picture financial statement users must examine both statements carefully. SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: The Value of Cash Flows for Investment Analysis Understanding Financial Statements Users too often ignore the statement of cash flows in assessing a company’s performance. Consideration is essential because: • Ultimately it is cash flows and not earnings that matters in measuring the real performance of a company • Cash flow statements are less subject to accounting manipulation than income statements. Free cashflows are a good measure of the amount of money that can be extracted from a company without damaging its core business. Free cash flows = cash flows from operations – capital expenditures SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Performance Ratios Understanding Financial Statements Assessing company performance over an extended period of time is essential. Important performance indicators (ratios) in this exercise include the following: Free cash flow / sales % Gross (profit) margin Net (income) margin Return on Equity Return on Assets Interest cover Current/Quick ratios Inventory turnover Where practical, comparisons should be made with competitors’ performance SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Notes to the Financial Statements Understanding Financial Statements Don’t ignore the notes to the financial statements. They define the basis on which the assets, liabilities and financial performance are measured and include important disclosures on financial statements items. Look out particularly for the following : •Revenue recognition accounting policy •Investment valuation policies and other disclosures •Accounts receivable disclosures on allowance for doubtful accounts and (concentration of) credit risk. •Contingent liabilities and commitments •Disclosures on nonrecurring charges •Related party transactions and balances Have these policies been consistently applied? SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.
    • INVESTMENT BASICS: Understanding Financial Statements Red Flags Frequent changes in accounting policies Declining cash flows Frequent acquisitions Intangible assets (goodwill) A/R rising at faster rate than sales Inventories rising faster than sales Increasing debt burden Change of CFO Change of Auditors SPONSORED BY: The Barbados Stock Exchange Inc © 2004 KPMG, the Barbados member firm of KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG International.