Financial Statements Cristina Pellegrino Financial Statements The written

Financial Statements Cristina Pellegrino

Financial Statements • The written records that provide users with information about the business activities of a company as well as the financial performance • Three Main Financial Statements: • The Balance Sheet • The Income Statement • The Statement of Cash Flows • Where can you find the financial statements? • www. sec. gov • Company Investor Relations Page • Fact. Set

The Balance Sheet • Provides an overview of a company’s assets, liabilities, and stockholders’ equity at a specific point in time. • Basic Balance Sheet Formula • Assets= Liabilities + Stockholder’s Equity • We use ratios to evaluate the balance sheet

The Balance Sheet: Assets

The Balance Sheet: Liabilities and SE

Balance Sheet Important Metrics • Current Ratio= Current Assets/ Current Liabilities • A company’s ability to pay short-term obligations • Debt to Equity= Debt/ Equity • Higher means more aggressive financing • Significant debt companies usually trade at a discount • Net Working Capital= Current Assets – Current Liabilities • This equation is sometimes adjusted • A company’s ability to meet current obligations and invest in other activities • Book Value= Total Assets- Intangible Assets- Liabilities • Total assets that shareholders would receive if the company was liquidated

The Income Statement • Provides insight into a company’s past performance over a specified period of time • Basic Income Statement Formula • Net Income= Revenues - Expenses

The Income Statement

The Income Statement: Gross Profit • Gross Profit= Revenue- Cost of Goods Sold • Revenue: Money generated from sale of product or service • COGS: Cost of materials directly related to sale or service • Gross Profit: Profit after deducting costs associated with making products or providing services

The Income Statement: Operating Income (EBIT) • Operating Income= Gross Profit- Op. EX • Op. Ex: Indirect costs of operating the business • Operating Income: Profit from a company’s core operations

The Income Statement: Net Income • Net Income= EBIT – Interest - Taxes • Interest: Tax deductible interest on company debt • Taxes: Tax Rate *( EBITInterest) • Net Income: “Earnings”

The Income Statement: Important Margins • Margins are profits as a % of revenue • Gross Margin: Gross Profit/ Revenue • Operating Margin: Operating Profit/ Revenue • Net Margin: Net Income/ Revenue

The Statement of Cash Flow • Shows users how well a company generates cash to fund operations, to fund investments, and to pay for debt for a specific period of time. • Three Main Activities: • Operating: Sources and uses of cash from running the businesses core operation • Ex. Net Income +D/A - Change in NWC • Investing: Sources and uses of cash for the future of the company, basically capital expenditures. • Ex. Money on PPE • Financing: Sources of cash from investors, banks, etc. Also cash paid to shareholders. • Ex. Dividends, stock buyback

The Cash Flow Statement

How They Relate t Ne e m o Balance Sheet E si R Inc C, Ch a es ng om c be rest t b te e D In Income Statement NW Net Income, Dividends, D&A e in Ca De bt sh Cash Flow Statement Investors are most interested in CASH

Free Cash Flow • Free Cash Flow: Cash left over after a company pays for its operations and capital expenditures. • Cash left over to pay lenders or give value to investors. Great value indicator. • Dividends, share buybacks, reinvestment, etc. Free Cash Flow= EBIT* (1 -tax rate) + D&A – CAPEX – Change in NWC • NOPAT= EBIT*(1 -tax rate)+ D&A • Excludes interest because interest payments are cash going to lenders • D&A: Noncash expenses that are included in opex as an accounting tool • CAPEX: Money on things such as PPE • Change in NWC: Current Assets (Not cash)- Current Liabilities (Not Debt) • Increase means change in operating liabilities has increased more than current assets. The use of cash has been delayed; therefore Free Cash Flow has increased.

What Resources To Use • Fact. Set • Dimenna Nyselius Library (https: //librarybestbets. fairfield. edu/finance) • Morningstar Investment Research Center • Value Line • Mergent Online • Seeking Alpha • FINVIZ • Tradingview • Investor Presentations • 10 K