Financial statements

The quarterly or annual financial statements that each company publishes and will be used by us are the following.

• Income Statement

Shows the revenues, expenses, profit over a one year period.

• Balance Sheet

Shows the overall financial status of a company at a given point of time.

• Cash Flow Statement

Similar to the income statement; but does not include depreciation, amortization etc.

A short description of each one follows.

Income statement

The income statement provides the most basic financial info on a company i.e. revenues, expenses and profit during a quarter or a whole year. In effect, it reflects the performance of the company during that period of time. It can generally be described by the following formula: 

Revenue - All Expenses = Income

Sample from yahoo finance:

 Key points:

• Revenue

The amount of money the company received during the period in question. This is considered by many the most important piece of information about a company.

• Expenses

- Cost of Revenue

Shows the production costs that brought the revenue. It includes cost of raw material, worker salary etc.

- Operating Expenses

Costs of R & D and administration, including marketing, are under operating expenses.

- Interest Expenses & Tax

All interest (e.g. from loans) and tax paid by the company.

- Non-recurring Events

Usually one-time expenses that don't fall in the other categories.

• Net Income

The actual profit of the company after all expenses are deducted from revenue.

Balance Sheet

It is called a "balance sheet" because it has to show that the basic company figures balance out. That is:

Liabilities + Stockholder Equity = Assets

The Balance Sheet is a snapshot of a company's financial status at a given point in time. One balance sheet cannot give information about growth rate etc, but can show if a company is healthy, or owes too much.

 Sample from yahoo finance:

Key points:

• Assets (Depreciated Values)

- Current Assets

Company assets that can be quickly converted to cash. Apart from actual cash, unsold inventory is an example of current assets.

- Non-current Assets

Other assets, like equipment, property etc, that cannot be easily converted to cash.

• Liabilities

- Current Liabilities

Short term liabilities. For example bills that have to be paid before the next statement.

- Non-current liabilities

It is favorable for a company to have Non-Current liabilities than Current ones, as this would not always mean bad health status for a company.

• Stockholder Equity (Internal Value)

After subtracting the liabilities from the assets, stockholder equity reflects the current value of the company that stockholders own.

• Net Tangible Assets (Book Value)

By subtracting intangible assets and goodwill from the equity, we get the book value of the company, which shows how much we would sell all tangible assets for (buildings, inventory, materials etc).

Cash Flow Statement

The cache flow statement is similar to the income statement; however it does not include non-cache charges and focuses on cache earnings before depreciation or amortization.

Sample from yahoo finance:

Key points:

• Cash Flows from Operating Activities

All the money that the company made or lost through its normal operating activities.

• Cash Flows from Investing Activities

Investing activities can include any third party bonds/shares/funds bought or sold, as well as property & infrastructure investments.

• Cash Flows from Financing Activities

Financing activities include borrowing or loaning money and money spent or received through company stocks / bonds.

Measures

The data collected from the above sourses can  be used to calculate some more useful measures, like:

 Debt / Asset ratio

A high ratio means a highly leveraged company.

• Current ratio = current assets / total current liabilities

A value of less than 1 shows liquidity problems.

• Working Capital = current assets - current liabilities

The Working Capital is a measure of a company's liquidity.

• Turnover Ratio = Goods sold / inventory

An indication of how quickly a company can sell its inventory. A higher number among similar industry companies is favorable.

• Margins

Margins are generally earnings as % of sales. A useful measure is the Net Margins which is net income divided by net sales, and a low value is a sign of a struggling company.

• EPS (Earnings per share) = Profit / number of shares

It is a rather straightforward calculation. However, the more useful prospective EPS growth rate is calculated through the consensus forecast earnings for the following year.

• P/E ratio (Price to earnings)

More useful than EPS to compare companies, it is the price per share divided by EPS and makes sense only for a company that has (positive) earnings. For a company with loss there is the PSR (price to sales ratio).

• PEG ratio (Prospective earnings growth)

PEG is calculated by dividing a company's expected annual percentage earnings growth taking by it's stock's P/E ratio.

• P/B ratio (Price to book) = market cap / book value.

Shows how much more than the book value of the company the market is willing to pay.

• ROE (Return on Equity)

ROE is an indication of a company's efficiency. It is calculated by taking a company's after-tax income and dividing by its book value.

• Divident Yield & Divident payout ratio

These measures show how much pay in dividends an investor can expect from his stock and the percentage of company earnings given as dividends respectively.