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Financial Reports and Ratios
 

Financial Reports and Ratios

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    Financial Reports and Ratios Financial Reports and Ratios Presentation Transcript

    • HOW TO READ FINANCIAL REPORTS
    • PUBLIC COMPANIES MUST REPORT THEIR FINANCIAL CONDITION
      • Government wants stable financial markets
        • Securities and Exchange Commission
      • Investors want accurate information
      • All financial reporting must conform with Generally Accepted Accounting Principles (GAAP)
    • ACCOUNTING
      • Double entry system
        • Designed as a double-check
      • Double entries consist of debits and credits
      • Do not think that “debit” is always bad and “credit” always good
      • Depends on which side of the balance sheet you are on
    • Various Types of Accounting
      • Financial accounting
        • Cash
        • Accrual
      • Cost
      • Tax
      • Managerial
    • Cash Accounting
      • Record transactions as cash flows in or out.
      • Most individuals operate on cash accounting basis.
    • Accrual Accounting
      • Record transactions as revenue and expenses accrue.
        • Haven’t paid December bills. In cash accounting wouldn’t record expenses until paid, but in accrual accounting would. Expenses have accrued.
    • May Also Choose Time Basis
      • Calendar Year
      • Fiscal Year-- any twelve-month period
        • July 1--June 30
        • September 1--August 30
    • Your “debit” card . . .
    • Friendly Bank
    • Types of Financial Reports
      • Cash Flow Statement
      • Balance Sheet
      • Income Statement
      • Annual Report
    • Cash Flow Statement Net amount of cash taken into the business during a given period and the cash paid out during that same period.
    • Inflows & Outflows
      • sales
      • borrowed funds
      • investment proceeds
      • from investors
      • purchases
      • operations
      • interest
      • taxes
      • dividends
    • Cash Flow Statement
      • two things not told by cash flow statement:
        • profit
        • financial condition or position of the business at the end of the year
    • Balance Sheet Two sides must balance
    • Balance Sheet
      • Assets
      • The “own” side
      • Liabilities + Equity
      • The “owe side”
    • Assets
      • Current
      • Non-current
    • Current Assets
      • Cash
      • Accounts Receivable
      • Inventory
        • Anything likely to be converted into cash, sold exchanged or expenses (used and then charged as an expense) in the normal course of business -- usually a year
    • Fixed Assets
      • Leasehold improvements
      • Intangible assets
        • Goodwill
        • Patents and trademarks
      • Notes receivable after one year
      • Other investments
      • Misc. assets that are not current
    • Not everyone agrees on classifications
      • Credit analysts view prepaid expenses as a noncurrent asset.
      • Accountants view prepaid expenses as a current asset.
      • Accountants and Internal Revenue auditors frequently disagree on classification of transactions.
    • Liabilities
      • Current and Long-term
    • Current Liabilities
      • Debts and obligations that are coming due within one year
        • Credit card debt
    • Long-Term Liabilities
      • Debts and obligations that are not coming due within a year.
        • Student loan
          • The monthly payments for the year are current liabilities but the principal and interest due are not current.
    • Equity
      • Shareholders’ equity.
      • Retained earnings.
    • Shareholders’ equity Interest of shareholders in the company.
    • Retained earnings Money the company keeps for itself rather than being paid out in dividends to the shareholders.
    • If a company is insolvent and owes more than it owns . . . Equity will be a negative amount. Negative amounts are shown in ( )
    • Income Statement
    • Other names for an income statement:
      • Profit and loss statement
      • Operating statement
      • Earning statement
    • Income statement Reports the results of operations over a specified period of time.
    • Income statement Summary of how much the business has taken in and paid out -- its profits.
    • Income statement
      • Revenues
      • Costs and expenses
      • Operating income
      • Income before taxes
      • Income taxes
      • Net income
      • Earnings per share
    • Non-operating Income or Expenses
      • Incomes, gains or losses from other investments
      • Gains or losses on the sale of fixed assets
      • Special payments to employees
      • Interest expense is a non-operating expense
    • Net income after taxes The bottom line
    • Dividend Distribution of earnings to shareholders.
    • Dividends
      • Prorated by class of security
        • Preferred stock
        • Common stock
      • May be paid in money, stock, scrip or, rarely, company products or property
    • Depreciation
      • Bookkeeping entry that reduces income without reducing cash.
      • May be combined with cost of goods sold.
      • Non-cash expense.
      • Added back to net income to determine company’s cash earnings.
    • Cash flow from operations Net income + depreciation
    • Amortization conversion of intangible long-lived assets into expenses over a number of accounting periods
    • Don’t be Fooled
      • Revenues ≠ Profit
      • Profit not only concern
      • Management has three tasks:
        • earning profit
        • controlling company’s financial condition
        • cash flow, preventing “cashouts”
    • Basic Financial Ratios (Balance Sheet Ratios) Percentages that provide understanding.
    • Vital Signs Or How to tell if a company is healthy. (Fundamental Analysis)
    • Ratios to evaluate . . .
      • Short Term Stability (Liquidity)
      • Long Term Stability
      • Management Performance
      • Profitability
      • Stock Prices
    • Evaluating Short Term Stability (Liquidity)
      • Current ratio
        • Current assets / current liabilities
      • Quick ratio
        • (Current assets - inventory) / current liabilities
    • Current ratio
      • Current assets divided by current liabilities.
      • Indication firm is sufficiently liquid
        • Enough working capital to ensure that firm can meet its current obligations and operate comfortably
      • Short-term solvency
      • Extra liquidity can held in a recession
        • Receivables might be slow
        • Inventory can lose value
      • Businesses do make mistakes in purchasing or marketing
    • Too much liquidity not good
      • Want to be lean and mean
      • Want to use cash resources efficiently
      • Could indicate shrinking operations
      • May be vulnerable to a take-over attempt
    • Current ratio
      • Manufacturing -- 1.5 to 1 to 2 to 1
    • Quick ratio
      • Also known as the acid-test ratio
      • Current ratio excluding inventory
      • Cash, Receivables / current liabilities
      • Test: what if sales stopped
    • Quick ratio
      • Assuming no negative trends in year to year comparison
      • Ratio of .50 to 1 or 1 to 1
    • Evaluating Long Term Stability (measuring capitalization)
      • Debt to equity
        • Total liabilities / total stockholders’ equity
      • Debt to total assets
        • Total liabilities / total assets
      • Long-term debt to total capitalization
        • Long-term debt / (long-term debt + stockholders’ equity)
      • Times interest earned
        • (earnings before taxes + interest charges) / interest charges
      • Fixed charge coverage
        • (earnings before taxes + interest charges) / (interest charges + lease payments)
    • Evaluating Management Performance (measuring activity)
      • Inventory
        • Cost of goods sold / inventory
      • Average collection period
        • Accounts receivable / (annual credit sales/360 days)
      • Fixed assets turnover
        • Net sales / net fixed assets
      • Asset turnover
        • Net sales / total assets
      • Operating profit margin
        • Net operating profit / net sales
    • Evaluating Profitability
      • Net profit margin
        • Net income / net sales
      • Return on equity
        • Net income / total stockholders’ equity
      • Operating profit margin
        • Net operating profit / net sales
    • Net Profit Margin
      • Net income / net sales
      • Measures overall efficiency
        • Success in managing operations
          • Borrowing money at a favorable rate
          • Investing idle cash to produce extra income
          • Taking advantage of tax benefits
    • Return on Equity
      • Net income / total stockholders’ equity
      • The bottom line measured against the money shareholders have invested
    • Operating profit margin
      • Net operating profit / net sales
      • Measures firm’s operating efficiency
    • Evaluating Stock Prices
      • Price-earnings ratio
        • Market price of common share / earnings per common share
      • Market-to-book ratio
        • Market price of common share / book value per share
      • Dividend pay-out ratio
        • Dividends per common share / earnings per common share
    • Price/Earnings Ratio
      • current market price / earnings per share
      • earnings per share (EPS)
        • net income for year / number of shares of stock
    • A few helpful terms.
    • EBITDA
      • Earnings Before Interest, Taxes, Depreciation and Amortization
      • EBITDA is not a measure of cash flow.
      • Is an indicator of company’s financial performance (revenues - expenses).
    • Trailing Twelve Months
      • Previous 12 months
        • As opposed to the past calendar year
    • INVESTMENT STRATEGIES
    • Two Types of Analysis
      • Fundamental
      • Technical
    • Fundamental Analysis
      • Sales (revenues)
      • Profitability
        • Earnings per share (higher is better)
        • Return on Equity (higher is better)
      • Stock is reasonably priced
        • P/E ratio (lower is better)
      • New or unique
      • Leader in some aspect
      • Superior in some way
    • Technical Analysis
      • Chart the stock price
    • Most Important Rule to Know
      • diversify