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Ceci Rodgers: Tackling Topics Through  Financial Statements and Footnotes
 

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 ...

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 Ceci Rodgers: Tackling Topics Through Financial Statements and Footnotes Presentation Transcript

  • 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
  • Goals
    • Understand how money flows through a company.
    • Understand how financial statements measure financial success or failure.
    • Identify the right questions to ask about each financial statement.
  • How money flows through a company
      • To be successful, every company must:
      • Sell something to produce revenues.
      • Collect on those sales and keep expenses below the cost of sales (in other words, make a profit).
      • Grow cash for expanding or acquiring other companies.
  • Success attracts investors
    • A company that is consistently profitable has the ability to attract and hold investment capital.
    • 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.
  • Financial reporting
    • 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.
    • Analysts and business reporters will often refer to this set of documents simply as “earnings.”
  • 10Q statement of financial condition
    • Three important pieces of the 10Q:
      • Income statement (how profitable is the company?)
      • Balance sheet (what is the financial health of the company?)
      • Statement of cash flows (how much liquidity does the company have?)
  • Income statement
    • Revenues (or “top line”). Ask the right questions to find out what’s behind rising or falling revenues:
      • Quantity or volume?
      • Price?
      • Product mix?
  • Example: Caterpillar Inc. Q1
    • http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?filingid=7917623&tabindex=2&type=html
    • (see hand-out)
  • Measures of profit
    • Operating income, operating earnings
      • Analysts pay attention to operating income, which doesn’t include interest and taxes.
      • Analysts like it because it allows them to focus just on how the company’s doing in its everyday business.
  • Net income (GAAP)
    • Journalists focus, rightly, on net income, otherwise known as the “bottom line.”
    • Sarbanes Oxley* mandated that all companies must report earnings, or net income, according to Generally Accepted Accounting Principles.
      • *The law passed in 2002 to prevent the kinds of accounting tricks that allowed Enron and WorldCom to hide losses. Requires more disclosure, transparency.
  • Groupon IPO
    • 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.
    • 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.
  • Impact of costs on profit
    • Gross margin (gross profit/revenues) %
      • Strips out cost of sales (commodities that go into the manufacture of the product)
      • Is the company’s overall profitability being hurt by rising input costs? Being helped by falling input costs?
    • Selling, general and administrative expenses (S G & A)
      • If this line is rising and eating into profits, cost-cutting and layoffs may not be far behind.
  • Balance sheet: key items for journalists
    • Under Assets :
    • Cash and equivalents: how much cash did the company have at the end of the quarter? Companies in trouble have less and less cash.
    • 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.
  • Balance sheet: key items for journalists
    • Under Liabilities:
    • Long-term debt: how much debt does the company have as a percentage of its equity or capital? Lower is better.
  • Statement of Cash Flows
    • Key line for business journalists:
      • Net cash provided by operating activities (commonly referred to as “operating cash”)
        • Thumb rule: You want to see a ratio of 1:1 to 3:1 of operating cash to net income for a healthy company.
        • Red flag: if the company is reporting profits but its operating cash is dwindling.
  • Other important SEC filings
    • 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.
    • Schedule 14A: Proxy statement to shareholders before the annual meeting: watch for executive compensation!
  • Other important SEC filings:
    • 10K or annual report
      • Management Discussion and Analysis (MD&A)
      • Notes, footnotes: Companies tend to bury bad news, if they can, in the footnotes.
  • Tools and resources
    • SEC www.sec.gov
    • Financial Accountng Standards Bd: www.fasb.org
    • Financial Industry Regulatory Authority www.finra.org
    • Yahoo Finance www.finance.yahoo.com
    • Morningstar www.morningstar.com
    • Investopedia (great articles, definitions) www.investopedia.com
    • Free online workshops for journalists: www.businessjournalism.org