Introduction to financial statement analysis
Financial statements: accounting reports with past performance information that a firm issues
periodically (quarterly 10-Q and annually 10-K) in generally accepted accounting principles (GAAP)
→ checked by third neutral party (auditor)
Annual report: financial statements to their shareholders
There are four types of financial statements:
Balance sheet (statement of financial position): POINT IN TIME
Assets → cash, inventory, property, plant, equipment etc.
Current assets: cash, marketable securities, accounts receivable, inventories → converted into cash
within one year
Long-Term assets: net property, plant, equipment, changes each year by depreciation expense → book
value asset = acquisition cost - accumulated depreciation
Goodwill and intangible assets = price paid company - book value
Amortization/impairment change = change in value of the acquired assets
Amortization: depreciation of your intangibles (brand name etc)
Liabilities → obligations to creditors, stockholders’ equity (difference between assets and liabilities)
Current liabilities: accounts payable, short-term debt, salary&taxes (not yet paid), unearned revenue
Net working capital (short run capital to run the business) = current assets - current liabilities
Long-term liabilities: long-term debt, capital leases, deferred taxes
Stockholders’ equity/book value of equity = assets - liabilities → net worth firm → not true since
many of the firm’s valuable assets are not captured on the balance sheet. Also price rises etc.
Market value of equity (market capitalization) = shares outstanding x market price per share
Market-to-book/price-to-book ratio = market value of equity / book value of equity , mostly >1
When <1 → value stocks
When >1 → growth stocks
Enterprise value (value business itself) = Market value of equity + debt - cash
Income statement (statement of financial performance): lists flow of revenues and expenses
generated by assets and liabilities (profit over a given time period) → bottom line (net income,
earnings)
Gross profit: revenues of sales - costs to make/sell products
Operating expenses: expenses from running the business (administration, R&D etc.) → operating
income (gross net profit)
Earnings before interest and taxes (EBIT): investments etc
Pretax and net income: EBIT → interest expense debt → pretax income
Earnings per share (EPS) = Net Income / Shares outstanding
Stock options and convertible bonds (debt converted to shares) to grow
Dilution: growth in number of shares, more shares outstanding, mostly lower price per share
Diluted EPS: earnings per share but now with more shares outstanding
