The document provides an overview of analyzing corporate profit and loss statements. It discusses key components of a P&L statement such as revenue, expenses, profit, earnings per share, and how it shows the path from revenue to net profit. It also discusses interpreting P&L statements, including checking footnotes and understanding the treatment of items like depreciation, subsidiaries versus associates, and minority interests. An example P&L statement is then presented for Hutchison Whampoa Limited to demonstrate these concepts.

1. Global Financial Journalism
Week 7: Analyzing Profit & Loss Statements
Jeffrey Timmermans
Thursday, 28 March, 13

2. Corporate disclosure
✤ Directors’ report
✤ Auditor’s report
✤ Profit & loss (or income) statement (P&L)
✤ Balance sheet
✤ Cash-flow statement
✤ Footnotes
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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. 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 company's 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$ 2.97
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5. The importance of cash
Profit is opinion, cash is fact
COMPANIES CAN LIE, BUT CASH CAN’T
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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-downs
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7. Accrual accounting
$4 000
HK
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8. Accrual accounting
Revenue Card balance
+HK$4000 +HK$4000
Accts. receivable
+HK$4000
Net profit
+(HK$4000-cost)
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9. Accrual accounting
Accts. receivable
-HK$4000
Cash Card balance
+HK$4000 -HK$4000
Cash
-cost of iPhone
Accts. payable
-cost of iPhone
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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 way
Thursday, 28 March, 13

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 Widgets
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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
interests
Thursday, 28 March, 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
ratio
Thursday, 28 March, 13

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 year
Thursday, 28 March, 13

15. The accounting equation
Assets - Liabilities =
Working Capital (or Shareholders’
Funds + Reserves)
Thursday, 28 March, 13

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 1,066
Thursday, 28 March, 13
Reserves 282,465 259,253 300,803

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 PAY
Thursday, 28 March, 13

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 cash
Thursday, 28 March, 13

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’ funds
Thursday, 28 March, 13

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 year
Thursday, 28 March, 13

21. Reading List
✤ Taparia, J. (2004). Understanding Financial Statements : A Journalist's
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.
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