Learn Financial

Financial Information

The Balance Sheet

The Balance Sheet Assets

Cash and cash equivalent

Account Receivable

Inventories

Investments

Properties, plant & equipments

Goodwill

Intangible assets etc.,
Liabilities
Short term debt

Payroll
Income taxes
Long term debt
Stockholders equity(net worth or book value)
Common stock – total value
Retained earning -- important to look at.
Treasury stock
Treasury stock

Current asset = asset can be converted into cash within a year(short period of time)
ROA = Return on Asset = Net Income/Total asset
ROE = Return on Equity = Net Income/Share holders equity
ROA in banking/financial industries is always high (12% or better) compare to other industries.

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The Income Statement
Net sales – cost of goods sold = net profit.
Net profit – (SGA +R&D + etc) = operating income
Operating income – (interest expense + taxes) = net income

Sometimes you add depreciation and amortization into the income statement. But this is stripped out in cash flow statement.

Basic EPS = net income/outstanding stocks
Diluted EPS = net income/(outstanding stocks + preferred stocks)
P/E = price of the stock/Earning per stock
PEG = PE/Future revenue growth per stock

The Cash Flow Statement

It shows whether the company is accumulating the cash or not. Also,
It shows how the cash being used (for growth, returned in dividend form, or accumulation)

How to read company’s financial heath:

Check the cash flow statement first. · See how much cash the company is generating · How efficiently the cash is being used. Then look at the balance sheet · Apply some basic ratios and find out where the company is and · The related stock price Now the income statement · See how the income is being generated Cautions: If the income outstrips the revenue, watch out the income growth will not sustain in future. ( this happens, when company reduces its SGA, or sells a part of company, takes lot of tax deduction on tax options, etc What to look into a company when screening: Look for a company that is growing (revenue) at 25% or more in last two year - top line Now where the revenue is coming from Selling more goods or service Raising prices Selling new goods or service Buying another company How long the revenue is sustainable? What are the reasons for future sustainable growth? How are the competitor doing? Company that has 15% profit growth can double its profit in 5 years Look for a company that is generating profit – bottom line How is the company generating the profit, not so sustainable tricks are Changing tax rate Changing share counts Pension gain One-time gains and Rampant cost cutting Anytime earning growth outstrips sales growth over a long period of time – you need to dig more. ROA = Net margin x Asset turn over = Net income/sales x sales/asset = Net income/asset Net margin = company can boost its profit by charging high prices (unique or high end products) Asset turnover = turn over your asset quickly (grocery store – commodity items, dell) ROE = ROA x financial leverage = ROA x assets/shareholders equity = net income/shareholders equity this measure company’s profitability on shareholders equity. Be wary of a high financial leverage ratio if a company’s business is cyclical or volatile. not so for banking industry ( it should have > 12% ROE) ROE above 40 – there is something wrong here. Cash flow: Free cash flow = cash flow from operations – capital spending Capital spending = building new facilities etc.. (minimum required to sustain the business) Well establish companies do have pile of cash and they are generating more. e.g. Pfizer, Microsoft -- very safe investments but less growth Where as companies like Lowe’s, Cheesecake Factory, Southwest Airline has high ROE but less cash flow, as they are still expanding. A company with fixed cost can flourish in good time, but get the same reverse effect in bad time. Debt/Equity = Generally debt should not be more than equity. Debt/Equity <.05 is good Times Interest Earned: How many multiples of interest payment a company earned. EBIT/Interest exense (EBIT- Earning before interest expense and tax)

The Balance Sheet Assets Cash and cash equivalent Account Receivable Inventories Investments Properties, plant & equipments Goodwill Intangible assets etc.,	Liabilities Short term debt Payroll Income taxes Long term debt	Stockholders equity(net worth or book value) Common stock – total value Retained earning -- important to look at. Treasury stock Treasury stock
Current asset = asset can be converted into cash within a year(short period of time) ROA = Return on Asset = Net Income/Total asset ROE = Return on Equity = Net Income/Share holders equity ROA in banking/financial industries is always high (12% or better) compare to other industries.
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