Ceci Rodgers: Tackling Topics Through Financial Statements and Footnotes

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Northwestern University/Medill School of Journalism's Ceci Rodgers discusses how journalists can dig deeper into a company's financial records by understanding their financial statements and footnotes. The presentation was delivered at the 2011 ASBPE National Conference.

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  • Income statement is sometimes called: statement of earnings, or profit-and-loss statement (P&L) The balance sheet is a lifetime scorecard – it’s also called the “statement of financial position.” The statement of cash flows has only been required in the U.S. since 1988 – internationally, only since 2005.
  • AOL Time Warner merger – a case of badwill! After the merger in 2000, the company had $128 billion in goodwill on its balance sheet. That was 60 percent of its total assets of $209 billion. Then the dot-com’s went bust, and just two years later, AOL Time Warner had to write off merger – at the height of the dot-com boom – was grossly inflated. Out of $209 billion in assets, $128 billion of it was goodwill from the merger.
  • The statement of cash flows deals with how cash moves through the company. There are two key numbers on this statement for our purposes: Net cash provided by operating activities: which basically means, how much cash that the company generated came from operations? You’ll hear it referred to as “Operating cash”
  • Ceci Rodgers: Tackling Topics Through Financial Statements and Footnotes

    1. 1. Financial reporting and tools ASBPE National Conference Aug. 4, 2011, Chicago, IL Ceci Rodgers [email_address] Lecturer, Business and Economics Northwestern University Medill School of Journalism
    2. 2. Goals <ul><li>Understand how money flows through a company. </li></ul><ul><li>Understand how financial statements measure financial success or failure. </li></ul><ul><li>Identify the right questions to ask about each financial statement. </li></ul>
    3. 3. How money flows through a company <ul><ul><li>To be successful, every company must: </li></ul></ul><ul><ul><li>Sell something to produce revenues. </li></ul></ul><ul><ul><li>Collect on those sales and keep expenses below the cost of sales (in other words, make a profit). </li></ul></ul><ul><ul><li>Grow cash for expanding or acquiring other companies. </li></ul></ul>
    4. 4. Success attracts investors <ul><li>A company that is consistently profitable has the ability to attract and hold investment capital. </li></ul><ul><li>A profitable company that manages its finances well has liquidity -- the ability to pay claims and debts when they come due and to meet unexpected needs for cash. </li></ul>
    5. 5. Financial reporting <ul><li>How successful a company is at selling its product, making a profit and building cash can be seen every quarter when it files a 10Q “statement of financial condition” with the SEC. </li></ul><ul><li>Analysts and business reporters will often refer to this set of documents simply as “earnings.” </li></ul>
    6. 6. 10Q statement of financial condition <ul><li>Three important pieces of the 10Q: </li></ul><ul><ul><li>Income statement (how profitable is the company?) </li></ul></ul><ul><ul><li>Balance sheet (what is the financial health of the company?) </li></ul></ul><ul><ul><li>Statement of cash flows (how much liquidity does the company have?) </li></ul></ul>
    7. 7. Income statement <ul><li>Revenues (or “top line”). Ask the right questions to find out what’s behind rising or falling revenues: </li></ul><ul><ul><li>Quantity or volume? </li></ul></ul><ul><ul><li>Price? </li></ul></ul><ul><ul><li>Product mix? </li></ul></ul>
    8. 8. Example: Caterpillar Inc. Q1 <ul><li>http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?filingid=7917623&tabindex=2&type=html </li></ul><ul><li>(see hand-out) </li></ul>
    9. 9. Measures of profit <ul><li>Operating income, operating earnings </li></ul><ul><ul><li>Analysts pay attention to operating income, which doesn’t include interest and taxes. </li></ul></ul><ul><ul><li>Analysts like it because it allows them to focus just on how the company’s doing in its everyday business. </li></ul></ul>
    10. 10. Net income (GAAP) <ul><li>Journalists focus, rightly, on net income, otherwise known as the “bottom line.” </li></ul><ul><li>Sarbanes Oxley* mandated that all companies must report earnings, or net income, according to Generally Accepted Accounting Principles. </li></ul><ul><ul><li>*The law passed in 2002 to prevent the kinds of accounting tricks that allowed Enron and WorldCom to hide losses. Requires more disclosure, transparency. </li></ul></ul>
    11. 11. Groupon IPO <ul><li>Groupon’s CEO said in the company’s prospectus that it doesn’t use net income, but “Adjusted Consolidated Segment Operating Income,” which excludes the cost of marketing its coupons to subscribers. </li></ul><ul><li>It’s never a good sign when a company makes up its own profit metrics and tells you that net income doesn’t matter. The SEC agreed and is investigating. </li></ul>
    12. 12. Impact of costs on profit <ul><li>Gross margin (gross profit/revenues) % </li></ul><ul><ul><li>Strips out cost of sales (commodities that go into the manufacture of the product) </li></ul></ul><ul><ul><li>Is the company’s overall profitability being hurt by rising input costs? Being helped by falling input costs? </li></ul></ul><ul><li>Selling, general and administrative expenses (S G & A) </li></ul><ul><ul><li>If this line is rising and eating into profits, cost-cutting and layoffs may not be far behind. </li></ul></ul>
    13. 13. Balance sheet: key items for journalists <ul><li>Under Assets : </li></ul><ul><li>Cash and equivalents: how much cash did the company have at the end of the quarter? Companies in trouble have less and less cash. </li></ul><ul><li>Goodwill: The difference between the price paid for a company during an acquisition and the net assets of the acquired company. As an intangible, it should be no more than 20 percent of total assets. </li></ul>
    14. 14. Balance sheet: key items for journalists <ul><li>Under Liabilities: </li></ul><ul><li>Long-term debt: how much debt does the company have as a percentage of its equity or capital? Lower is better. </li></ul>
    15. 15. Statement of Cash Flows <ul><li>Key line for business journalists: </li></ul><ul><ul><li>Net cash provided by operating activities (commonly referred to as “operating cash”) </li></ul></ul><ul><ul><ul><li>Thumb rule: You want to see a ratio of 1:1 to 3:1 of operating cash to net income for a healthy company. </li></ul></ul></ul><ul><ul><ul><li>Red flag: if the company is reporting profits but its operating cash is dwindling. </li></ul></ul></ul>
    16. 16. Other important SEC filings <ul><li>8K: Disclosure of information material to the company (anything that could cause an investor to buy or sell the stock), per regulation FD, full disclosure. </li></ul><ul><li>Schedule 14A: Proxy statement to shareholders before the annual meeting: watch for executive compensation! </li></ul>
    17. 17. Other important SEC filings: <ul><li>10K or annual report </li></ul><ul><ul><li>Management Discussion and Analysis (MD&A) </li></ul></ul><ul><ul><li>Notes, footnotes: Companies tend to bury bad news, if they can, in the footnotes. </li></ul></ul>
    18. 18. Tools and resources <ul><li>SEC www.sec.gov </li></ul><ul><li>Financial Accountng Standards Bd: www.fasb.org </li></ul><ul><li>Financial Industry Regulatory Authority www.finra.org </li></ul><ul><li>Yahoo Finance www.finance.yahoo.com </li></ul><ul><li>Morningstar www.morningstar.com </li></ul><ul><li>Investopedia (great articles, definitions) www.investopedia.com </li></ul><ul><li>Free online workshops for journalists: www.businessjournalism.org </li></ul>

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