Financial Statement Part 2

The Balance Sheet

• tells you how financially strong a company is. companies that are financially strong are able to recover from recessions and business mistakes the management might make.
• ASSETS=LIABILITIES + EQUITY
• When Assets increase, (Liabilitiy + Equity) must increase.

Contents in a Balance Sheet consist of ASSETS AND LIABILITIES. There are CURRENT ASSETS and LONG-TERM ASSETS, and vice versa for liabilitiies.

Current Asset

• Cash & Equivalents- having too much cash is bad as it shows the management is not fully utilising the investors' money to good use.
• Accounts Receivables (AR) - money owed to the company by customers who have yet to pay for their purchase of the company's products or services.
• Inventories-important to watch in manufacturing and retail companies. They include products yet to be sold.

Long Term Assets

• Property, Plant & Equipment (PPE) - it form the company's infrastructure and includes buildings, land, plant, machinery equipment and so on.
• Long-Term Investments-includes money invested in long-term bonds or stocks in other companies.
• Intangible Assets-include the value of intellectual property the company owns as well as its goodwill. It is something like a brand which investors are willing to pay over the book value of the company's equity.

Current Liabilities

• Account Payables (AP) - bills that a company owes to individuals (like staff salaries) and other companies (suppliers) that are due to be paid within a year.
• Short-term Borrowings- money a company borrows for less than a year.

Long-term Liabilities- long term debt that company has borrowed from bank or bonds that it has issued to the public.

Profit and Loss Statement

Sales Revenue

• known as just 'sales' or 'turnover', represents how much money the company has brought in over the eriod.
• Revenue= Price per unit x Quantity of units sold.

Cost of Goods Sold (COGS)

Gross Profit

• Gross profit = Sales Revenue - COGS. it tells you how much a company is able to mark up its product or services over the cost of producing it.
• Gross margin (known as profit margin) = gross profit/sales revenue x 100%
• companies with high GM above 25% over five to ten years indicate that they have highly differentiated products and have a strong competitive advantage against competitors.
• company with falling margins is a sure sign that it is facing greater and greater competition.

Operating Expenses

• Research & Development & marketing ensures the company continues to innovate better products and build its brand name.
• Depreciation is when a company buys a physical asset to last a long time (e.g. factory) and expenses its cost over a number of years.
• Non-recurring charges/gains are one off chages or gains that are not part of ongoing operations and not likely to be repeated.

Operating Income

• shows the profit the company made from its actual operations.
• Operating income= Sales Revenue - COGS - Operating Expenses.
• company may also make additional profits or losses from interest income (from money it puts in the bank) or from one off non-operational activities like selling an investment for a profit (known as extraordinary items).

Net Profit after Tax (Net Income)

• the actual profit the company has made.
• it shows how much goes to you as dividends or goes to retained earnings, which will then increase the company's value and hence share price.
• Net Profit after Tax= Operating Income +/- interest income/expense - Taxes

Earnings Per Share (EPS)

• EPS = Net Profit After Tax/Number of Shares Outstanding
• increasing EPS leads to higher intrinsic value and higher share price

PE Ratio

• PE = Current share price/EPS

The Statement of Cash Flows

• records all the cash that comes into a company and all the cash that goes out.
• tell you how much cash the company actually generated and how much it has used up over the accounting period.
• gives a true picture of the company's profitability & stability.
• a company can show good earnings report on its income statement, but cash flow tells extactly how much cash was received.

Cash Flow from Operating Activities

• how much cash goes in and out of the company as a result of it selling its goods and services.

Cash Flow from Investing Activities

Cash Flow from Financing Activites

Increase (decrease) in cash equivalents = Operating cash flow + Investing cash flow + Financing cash flow