Global Financial Journalism    Week 7: Analyzing Profit & Loss Statements    Jeffrey TimmermansThursday, 28 March, 13
Corporate disclosure    ✤    Directors’ report    ✤    Auditor’s report    ✤    Profit & loss (or income) statement (P&L)  ...
Profit & loss statement    ✤    Also called an “income statement”    ✤    A roadmap that leads you from revenue to net pro...
Hutchison Whampoa Limited     Consolidated Income Statement     for the year ended 31 December 2009                       ...
The importance of cash                         Profit is opinion, cash is fact      COMPANIES CAN LIE, BUT CASH CAN’TThursd...
Opinion in the P&L    ✤    Revenue booked at time of sale    ✤    Length of useful life of fixed assets    ✤    Some expens...
Accrual accounting                              $4 000                         HKThursday, 28 March, 13
Accrual accounting                     Revenue     Card balance                    +HK$4000      +HK$4000             Acct...
Accrual accounting             Accts. receivable                -HK$4000                      Cash       Card balance     ...
Depreciation    ✤    Takes into account the decline in value of fixed assets over time          ✤    Unlike property, equip...
Subsidiaries vs. Associates                         Subsidiary                               Associate                    ...
Minority interests                          National                         Widgets Ltd.                                 ...
Business Analysis: Step 1    ✤    Revenue growth: This period’s revenue - Last period’s revenue x 100                     ...
Balance sheet    ✤    A snapshot at a particular time of a company’s assets (what it owns)         and liabilities (what i...
The accounting equation                               Assets - Liabilities =                         Working Capital (or S...
Current liabilities                     157,260       130,581      187,680                                                ...
Some more ratios (Balance sheet)                                                        <1.5                              ...
Cash-flow statement                                      Hutch cash flow    ✤    Tracks the inflow and outflow of cash durin...
And still more ratios    ✤    Inventory turnover:                           <4               Annual cost of goods sold    ...
Some other red flags    ✤    Declining trend in net and operating profit over several years    ✤    Compare cash flow from o...
Reading List    ✤    Taparia, J. (2004). Understanding Financial Statements : A Journalists         Guide. Oak Park, IL: M...
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  1. 1. Global Financial Journalism Week 7: Analyzing Profit & Loss Statements Jeffrey TimmermansThursday, 28 March, 13
  2. 2. Corporate disclosure ✤ Directors’ report ✤ Auditor’s report ✤ Profit & loss (or income) statement (P&L) ✤ Balance sheet ✤ Cash-flow statement ✤ FootnotesThursday, 28 March, 13
  3. 3. Profit & loss statement ✤ Also called an “income statement” ✤ A roadmap that leads you from revenue to net profit ✤ Details the expenses that are incurred on the way to net profit ✤ Consolidated vs. company ✤ Always check the footnotes!Thursday, 28 March, 13
  4. 4. Hutchison Whampoa Limited Consolidated Income Statement for the year ended 31 December 2009 As restated Note 1 2009 2008 Note HK$ millions HK$ millions Company and subsidiary companies: Revenue 2 208,808 235,478 Cost of inventories sold (74,275) (77,172) Staff costs (28,309) (31,929) Telecommunications customer acquisition costs (16,544) (22,926) Depreciation and amortisation 2 (16,258) (24,876) Other operating expenses (60,769) (66,001) Change in fair value of investment properties 1,117 672 Profit on disposal of investments and others 3 12,472 3,458 Share of profits less losses after tax of: Associated companies before profit on disposal of investments and others 5,927 12,522 Jointly controlled entities 3,677 5,286 Associated companys profit on disposal of an investment and others 3 - 3,122 2 35,846 37,634 Interest and other finance costs 4 (9,613) (17,286) Profit before tax 26,233 20,348 Current tax charge 5 (4,588) (3,443) Deferred tax credit 5 92 2,576 Profit after tax 21,737 19,481 Allocated as : Profit attributable to minority interests (7,569) (6,800) Profit attributable to shareholders of the Company 14,168 12,681 Earnings per share for profit attributable to shareholders of the Company 6 HK$ 3.32 HK$ 2.97Thursday, 28 March, 13
  5. 5. The importance of cash Profit is opinion, cash is fact COMPANIES CAN LIE, BUT CASH CAN’TThursday, 28 March, 13
  6. 6. Opinion in the P&L ✤ Revenue booked at time of sale ✤ Length of useful life of fixed assets ✤ Some expenses might be capitalized as assets ✤ Sales to related entities recorded as ordinary revenue ✤ Non-operating or “Other” income ✤ “Extraordinary” or “one-time” profit/loss; investment write-downsThursday, 28 March, 13
  7. 7. Accrual accounting $4 000 HKThursday, 28 March, 13
  8. 8. Accrual accounting Revenue Card balance +HK$4000 +HK$4000 Accts. receivable +HK$4000 Net profit +(HK$4000-cost)Thursday, 28 March, 13
  9. 9. Accrual accounting Accts. receivable -HK$4000 Cash Card balance +HK$4000 -HK$4000 Cash -cost of iPhone Accts. payable -cost of iPhoneThursday, 28 March, 13
  10. 10. Depreciation ✤ Takes into account the decline in value of fixed assets over time ✤ Unlike property, equipment wears out and needs to be replaced ✤ Recorded as an expense on the P&L ✤ Has nothing to do with cash! ✤ Is added back in to profit on the cash flow statement ✤ “Amortization” works in the same wayThursday, 28 March, 13
  11. 11. Subsidiaries vs. Associates Subsidiary Associate International International Widgets Ltd. Widgets Ltd. >50% 20%-49.9% National Associated Widgets Ltd. Widgets Ltd. International Widgets has “control” International Widgets has “significant over National Widgets influence” over Associated WidgetsThursday, 28 March, 13
  12. 12. Minority interests National Widgets Ltd. 20 80% Profit % st stake (100%) a ke International Fred’s House of 20% Widgets Ltd. Pancakes Ltd. Minority interestsThursday, 28 March, 13
  13. 13. Business Analysis: Step 1 ✤ Revenue growth: This period’s revenue - Last period’s revenue x 100 Last period’s revenue Net Profit ✤ Net profit margin: x 100 Revenue AND: Price/Earnings ratioThursday, 28 March, 13
  14. 14. Balance sheet ✤ A snapshot at a particular time of a company’s assets (what it owns) and liabilities (what it owes) ✤ Major asset purchases or sales will be visible from the balance sheet ✤ The company’s total debt will also be on the balance sheet ✤ Assets & liabilities are categorized by time: current vs. non-current ✤ Current assets can be turned into cash within one year ✤ Current liabilities must be repaid within one yearThursday, 28 March, 13
  15. 15. The accounting equation Assets - Liabilities = Working Capital (or Shareholders’ Funds + Reserves)Thursday, 28 March, 13
  16. 16. Current liabilities 157,260 130,581 187,680 Current liabilities Trade and other payables 10 Trade and other payables Bank and other debts 10 73,029 82,599 90,141 Bank and other debts Current tax liabilities 17,589 23,945 50,255 Hutchison Whampoa Limited Current tax liabilities 3,249 1,274 2,336 Consolidated Statement of Financial Position 93,867 107,818 142,732 at 31 December 2009 Net current assets Net current assets 63,393 22,763 44,948 As restated As restated Note 1 Note 1 Total assets less current liabilities Total assets less current liabilities 597,530 560,363 647,776 31 December 31 December 1 January Non-current liabilities 2009 2008 Non-current liabilities 2008 Bank and other debts Note HK$ millions andHK$ millions HK$ millions Bank other debts 242,851 234,141 260,086 Interest bearing loans from minority shareholders ASSETS Interest bearing loans from minority shareholders 13,424 13,348 12,508 Deferred tax liabilities Non-current assets Deferred tax liabilities 13,355 13,616 17,957 Pension obligations Pension obligations 2,436 2,541 1,468 Fixed assets 171,399 173,246 181,342 Other non-current liabilities Other non-current liabilities 4,520 4,586 5,929 Investment properties 42,323 41,282 43,680 Leasehold land 33,984 34,745 36,272 276,586 268,232 297,948 Telecommunications licences 70,750 72,175 91,897 Goodwill 28,858assets Net 30,436 31,573 Net assets 320,944 292,131 349,828 Brand names and other rights 7,351 10,486 10,901 Associated companies 84,748 CAPITAL AND RESERVES75,545 76,478 CAPITAL AND RESERVES Interests in joint ventures 51,568 capital 45,865 Share 39,725 Share capital 1,066 1,066 1,066 Deferred tax assets Reserves 14,657 13,248 17,619 Reserves 282,465 259,253 300,803 Other non-current assets 5,286 8,904 5,082 Liquid funds and other listed investments Total shareholders funds 23,213 30,735 69,192 Total shareholders funds 283,531 260,319 301,869 Minority interests Minority interests 37,413 31,812 47,959 534,137 537,600 602,828 Total equity Total equity 320,944 292,131 349,828 Current assets Cash and cash equivalents 8 92,521 57,286 111,307 Trade and other receivables 9 48,146 54,767 55,374 Inventories 16,593 18,528 20,999 Appendix 157,260 130,581 187,680 HWL 2009 Annual Results Current liabilities Page 3 of 27 Trade and other payables 10 73,029 82,599 90,141 Bank and other debts 17,589 23,945 50,255 Current tax liabilities 3,249 1,274 2,336 93,867 107,818 142,732 Net current assets 63,393 22,763 44,948 Total assets less current liabilities 597,530 560,363 647,776 Non-current liabilities Bank and other debts 242,851 234,141 260,086 Interest bearing loans from minority shareholders 13,424 13,348 12,508 Deferred tax liabilities 13,355 13,616 17,957 Pension obligations 2,436 2,541 1,468 Other non-current liabilities 4,520 4,586 5,929 276,586 268,232 297,948 Net assets 320,944 292,131 349,828 CAPITAL AND RESERVES Share capital 1,066 1,066 1,066Thursday, 28 March, 13 Reserves 282,465 259,253 300,803
  17. 17. Some more ratios (Balance sheet) <1.5 Current assets A SIMPLE MEASURE ✤ Current ratio: OF LIQUIDITY Current liabilities <1 Current assets - Inventories A MEASURE OF ✤ Quick ratio: SHORT-TERM Current liabilities LIQUIDITY <7 ✤ Accts. receivable A MEASURE OF Annual revenue turnover: ABILITY TO GET Accounts receivable CUSTOMERS TO PAYThursday, 28 March, 13
  18. 18. Cash-flow statement Hutch cash flow ✤ Tracks the inflow and outflow of cash during the course of one statement in Evernote financial period ✤ Three sections: cash flow from operating activities, from investing activities, from financing activities ✤ Cash flow from operating activities starts with profit, and then subtracts all non-cash items (like depreciation) to get to cashThursday, 28 March, 13
  19. 19. And still more ratios ✤ Inventory turnover: <4 Annual cost of goods sold A MEASURE OF THE AGE OF INVENTORY (Beginning inventory + final inventory)/2 >1 Total liabilities A MEASURE OF ✤ Debt-to-equity ratio: INDEBTEDNESS Shareholders’ fundsThursday, 28 March, 13
  20. 20. Some other red flags ✤ Declining trend in net and operating profit over several years ✤ Compare cash flow from operations with net profit ✤ Are both trending higher, by same general percentage? ✤ Off-balance sheet entities ✤ Presence of “non-recurring charges” year after yearThursday, 28 March, 13
  21. 21. Reading List ✤ Taparia, J. (2004). Understanding Financial Statements : A Journalists Guide. Oak Park, IL: Marion Street Press. ✤ Vause, B. (2009). Guide to Analysing Companies (5th ed.). New York: Bloomberg Press. ✤ Fraser, L. M., & Ormiston, A. (2010). Understanding Financial Statements (9th ed.). Upper Saddle River, N.J.: Prentice Hall.Thursday, 28 March, 13

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