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Balance Sheet, Cash Flow, and Income Statement Overview

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Balance Sheet, Cash Flow, and Income Statement Overview

  1. 1. Balance Sheet, Cash Flow, and Income Statement Overview Michael Kraus Senior Financial Director 26 September 2006
  2. 2. Income Statement <ul><li>Parts: </li></ul><ul><ul><li>Revenues and Breakdown </li></ul></ul><ul><ul><li>Operating Costs and Breakdown </li></ul></ul><ul><ul><li>Net Income and NI applicable to Common Shares </li></ul></ul><ul><li>The Income Statement tells the investor exactly where the revenues and costs come from. </li></ul><ul><li>These are fairly self-explanatory. </li></ul><ul><li>The key to look for is sustained revenue growth. Then look at all other numbers tied to this. </li></ul>
  3. 3. What is it? <ul><li>Summary of revenues and expenses, and showing the net profit or loss in a specified accounting period </li></ul><ul><li>&quot;profit and loss statement&quot; or &quot;statement of revenue and expense&quot;. </li></ul><ul><li>Most analyzed statement – key to profitability </li></ul>
  4. 4. When? <ul><li>Every financial quarter (10-Q) </li></ul><ul><li>Yearly statements (10-K) </li></ul><ul><li>GAAP – Generally Accepted Accounting Principles </li></ul>
  5. 5. Components <ul><li>Revenue – COGS = Gross Profit </li></ul><ul><li>Gross Profit – Expenses = Operating Income </li></ul><ul><li>Expenses: </li></ul><ul><ul><li>Selling, General & Administrative </li></ul></ul><ul><ul><li>Research and Development </li></ul></ul>
  6. 6. Components <ul><li>Additional Expenses & Income </li></ul><ul><li>Income Tax </li></ul><ul><li>Interest Expense and Interest Income </li></ul><ul><li>Net Income = Operating Income – Additional Expenses </li></ul>
  7. 7. Ratios <ul><li>Earnings Per Share (EPS) </li></ul><ul><ul><li>= Net Income / Shares Outstanding </li></ul></ul><ul><ul><li>Diluted, Non Diluted? </li></ul></ul><ul><li>Gross Margin % = Gross Profit /Net Revenues </li></ul><ul><li>ROE </li></ul><ul><li>ROA </li></ul>
  8. 8. Balance Sheet <ul><li>Include: </li></ul><ul><ul><li>Assets </li></ul></ul><ul><ul><li>Liabilities </li></ul></ul><ul><ul><li>Stockholders’ Equity </li></ul></ul><ul><ul><li>Assets = Liabilities + Stockholders’ Equity </li></ul></ul><ul><ul><ul><li>This is the key accounting equation and should always be analyzed. </li></ul></ul></ul><ul><ul><ul><li>If the two sides do not equal something IS WRONG. </li></ul></ul></ul>
  9. 9. Assets <ul><li>Current Assets: These are short-term(1 year), highly liquid assets). I.E.: Cash, Inventory, and Accounts Receivable. </li></ul><ul><li>Fixed Assets: Machines, Computers, Buildings, Land, etc. (I.E. Capital). </li></ul><ul><li>Intangible Assets: Copyrights, Patents, Intellectual Property, and Goodwill </li></ul>
  10. 10. Liabilities <ul><li>Current Liabilities: One year maturity. Includes dividends payable, accounts payable (what the company owes to suppliers for buying raw materials or retail products on credit), interest payments on long-term debt, and taxes payable. </li></ul><ul><li>Long Term Liabilities: Includes leases, bond repayments and other items due in more than one year. </li></ul>
  11. 11. Stockholders’ Equity <ul><li>Stockholder’s Equity: This is the initial amount of money invested in the company plus any retained earnings over the years. The retained earnings portion is much larger than initial investments. Also called “net worth.” </li></ul><ul><li>Retained Earnings: This is simply what earnings were reinvested in the company. </li></ul>
  12. 12. What To Look For <ul><li>One thing to understand about a balance sheet is that most ratios are calculated from the balance sheet. </li></ul><ul><li>For example, because Current Assets pays for Current Liabilities we should look for a company whose current assets are greater than their current liabilities. This reflects a companies ability to pay off short term debt and tells us how liquid the company is. This is called current ratio. It also can signify if a company is reinvesting in itself through debt or through liquidity. </li></ul>
  13. 13. Strong Signals <ul><li>Current Assets > Current Liabilities </li></ul><ul><ul><li>Current Ratio that signifies a companies ability to pay off short term debt and its abilities to reinvest in itself. </li></ul></ul><ul><li>Long Term Debt < Net Worth </li></ul><ul><ul><li>This signals to the investor that other companies or investors do not have significant leverage on the company incurred by debt. </li></ul></ul>
  14. 14. A Simple Example
  15. 15. What types of companies have what signals? <ul><li>What type of company would have $700,000,000,000 in cash or other current assets, and, likewise, have $400,000,000,000 in debt? </li></ul><ul><li>Which companies would have Total Assets comprised mostly of Intangibles? A good example is a company with $80 b market cap having intangibles be ~8% of market capitalization. </li></ul><ul><li>If you can guess specifically what the above companies are, I’ll buy you a coffee. </li></ul>
  16. 16. Cash Flow Statement <ul><li>This sheet includes Income and where the income comes from. </li></ul><ul><li>It is broken down into: </li></ul><ul><ul><li>Operating Activities (selling products, lending, borrowing) </li></ul></ul><ul><ul><li>Investing Activities (assets, capital) </li></ul></ul><ul><ul><li>Financing Activities (issuing stocks, debt, cash dividends paid) </li></ul></ul><ul><li>When looking at the Cash Flow statement it is good that net cash raises from year to year, but the important detail to pay attention to is how net cash raises. If net cash raises and cash flow from sales is constant but the company has been financing themselves with debt, this is a bad sign. </li></ul>
  17. 17. <ul><li>No numbers are recorded in cash flow statements until money actually trades hands. </li></ul><ul><li>Cash flow statements do not describe the financial strength of a company; instead, they show all flow variables for cash in a given period. </li></ul>Notes
  18. 18. Profit vs. Cash Flow Concerns <ul><li>Say a company is losing money and needs to liquidate assets so it sells five factories at liquidation prices. In this case it will actually lose money (sunk costs and incremental costs) on the transaction; however, the cash flow statement will show a positive statement under Cash Flow from Investing Activities. </li></ul><ul><li>This is a primary reason why financial statements must be examined thoroughly. </li></ul>
  19. 19. Ratios derived from Cash Flow Statements <ul><li>From Cash Flow statements we get numbers like: </li></ul><ul><ul><li>Operating Cash Flow Ratio which is cash flow from operations/current liabilities. This shows a firm’s ability to service its debt and shows liquidity in the short term. </li></ul></ul>
  20. 20. Final Comments <ul><li>The MOST important part of examining financial statements is reading the accompanying notes. </li></ul><ul><li>Now we will examine the packet. </li></ul>
  21. 21. Questions?

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