Showing posts with label financial statements. Show all posts
Showing posts with label financial statements. Show all posts

Wednesday 28 March 2018

FINANCIAL STATEMENT OVERVIEW: where the gold is hidden

FINANCIAL STATEMENT OVERVIEW: WHERE THE GOLD Is HIDDEN

Financial statements are where Warren mines for companies with the golden durable competitive advantage. It is the company's financial statements that tell him if he is looking at a mediocre business forever moored to poor results or a company that has a durable competitive advantage that is going to make him superrich.

Financial statements come in three distinct flavors:

First, there is the Income Statement: The income statement tells us how much money the company earned during a set period of time. The company's accountants traditionally generate income statements for shareholders to see for each three month period during the fiscal year and for the whole fiscal year. Using the company's income statement, Warren can determine such things as the company's margins, its return equity, and, most important, the consistency and direction of its earnings. All of these factors are necessary in determining whether the company is benefiting from a durable competitive advantage.

The second flavor is the Balance Sheet: The balance sheet tells us how much money the company has in the bank and how much money it owesSubtract the money owed from the money in the bank and we get the net worth of the company. A company can create a balance sheet for any given day of the year, which will show what it owns, what it owes, and its net worth for that particular day.

Traditionally, companies generate a balance sheet for shareholders to see at the end of each three-month period of time (called quarter) and at the end of the accounting or fiscal year. Warren has learned to use some of the entries on the balance sheet-such as the amount of cash the company has or the amount of long-term debt it carries---as indicators of the presence of a durable competitive advantage.

Third, there is the Cash Flow Statement: The cash flow statement tracks the cash that flows in and out of the business. The cash flow statement is good for seeing how much money the company is spending on capital improvements. It also tracks bond and stock sales and repurchases. A company will usually issue a cash flow statement along with its other financial statements.

In the chapters ahead we shall explore in detail the income statement, balance sheet, and cash flow statement entries and indicators that Warren uses to discover whether or not the company in question has a durable competitive advantage that will make him rich over the long run.

                       -----------------------


WHERE WARREN GOES TO FIND FINANCIAL INFORMATION

In the modern age of the Internet there are dozens of places where one can easily find a company's financial statements. The easiest access is through either MSN.com (http://money central.msn.com/investor/home.asp) or Yahoo's Finance web page (www.finance.yahoo.com).



We use both, but Microsoft Network's MSN.com has more detailed financial statements. To begin, find where you type in the symbol for the stock quotes on both sites, then type in the name of the company. Click it when it pops up, and both MSN and Yahoo! will take you to that company's stock quote page. On the left you'll find a heading called "Finance," under which are three hyperlinks that take you to the company's balance sheet, income statement, and cash flow. Above that, under the heading "SEC," is a hyperlink to documents filed with the U.S. Securities and Exchange Commission (SEC). All publicly traded companies must file quarterly financial statements with the SEC; these are known as 8Qs. Also filed with the SEC is a document called the 10K, which is the company's annual report. It contains the financial statements for the company's accounting or fiscal year. Warren has read thousands of 10Ks over the years, as they do the best job of reporting the numbers without all the fluff that can get stuffed into a shareholders' annual report.

For the hard-core investor Bloomberg.com offers the same services and a lot more, for a fee. But honestly, unless we are buying and selling bonds or currencies, we can get all the financial information we need to build a stock portfolio for free from MSN and Yahoo! And "free" financial information always makes us smile!

Friday 5 April 2013

Warren Buffett's Interpretation of Financial Statements and Analysis

Warren Buffett's Interpretation of Financial Statements and Analysis




Warren Buffett's Interpretation of the Income Statement and Analysis



Warren Buffett's Interpretation of a Balance Sheet and Analysis



Warren Buffett's Interpretation of Cash Flows and Analysis






Thursday 4 October 2012

Evaluating Your Personal Financial Statement


Month after month, many individuals look at their bank and credit statements and are surprised that they spent more than they thought they did. To avoid this problem, one simple method of accounting for income and expenditures is to have personal financial statements. Just like the ones used by corporations, financial statements provide you with an indication of your financial condition and can help with budget planning. There are two types of personal financial statements: Let's explore these in more detail.

Personal Cash Flow Statement

A personal cash flow statement measures your cash inflows and outflows in order to show you your net cash flow for a specific period of time. Cash inflows generally include the following:
  • Salaries
  • Interest from savings accounts
  • Dividends from investments
  • Capital gains from the sale of financial securities like stocks and bonds
Cash inflow can also include money received from the sale of assets like houses or cars. Essentially, your cash inflow consists of anything that brings in money.
Cash outflow represents all expenses, regardless of size. Cash outflows include the following types of costs:
  • Rent or mortgage payments
  • Utility bills
  • Groceries
  • Gas
  • Entertainment (books, movie tickets, restaurant meals, etc.)
The purpose of determining your cash inflows and outflows is to find your net cash flow. Your net cash flow is simply the result of subtracting your outflow from your inflow. A positive net cash flow means that you earned more than you spent and that you have some money leftover from that period. On the other hand, a negative net cash flow shows that you spent more money than you brought in.

Personal Balance Sheet

A balance sheet is the second type of personal financial statement. A personal balance sheet provides an overall snapshot of your wealth at a specific period in time. It is a summary of your assets (what you own), your liabilities (what you owe) and your net worth (assets minus liabilities).

Assets

Assets can be classified into three distinct categories:
  • Liquid Assets: Liquid assets are those things you own that can easily be sold or turned into cash without losing value. These include checking accounts, money market accounts, savings accounts and cash. Some people include certificates of deposit (CDs) in this category, but the problem with CDs is that most of them charge an early withdrawal fee, causing your investment to lose a little value.
  • Large Assets: Large assets include things like houses, cars, boats, artwork and furniture. When creating a personal balance sheet, make sure to use the market value of these items. If it's difficult to find a market value, use recent sales prices of similar items.
  • Investments: Investments include bonds, stocks, CDs, mutual funds and real estate. You should record investments at their current market values as well.
Liabilities 

Liabilities are merely what you owe. Liabilities include current bills, payments still owed on some assets like cars and houses, credit card balances and other loans.

Net Worth

Your net worth is the difference between what you own and what you owe. This figure is your measure of wealth because it represents what you own after everything you owe has been paid off. If you have a negative net worth, this means that you owe more than you own.
Two ways to increase your net worth are to increase your assets or decrease your liabilities. You can increase assets by increasing your cash or increasing the value of any asset you own. One note of caution: make sure you don't increase your liabilities along with your assets. For example, your assets will increase if you buy a house, but if you take out a mortgage on that house your liabilities will also increase. Increasing your net worth through an asset increase will only work if the increase in assets is greater than the increase in liabilities. The same goes for trying to decrease liabilities. A decrease in what you owe has to be greater than a reduction in assets.

Bringing Them TogetherPersonal financial statements give you the tools to monitor your spending and increase your net worth. The thing about personal financial statements is that they are not just two separate pieces of information, but they actually work together. Your net cash flow from the cash flow statement can actually help you in your quest to increase net worth. If you have a positive net cash flow in a given period, you can apply that money to acquiring assets or paying off liabilities. Applying your net cash flow toward your net worth is a great way to increase assets without increasing liabilities or decrease liabilities without increasing assets. 


The Bottom Line

If you currently have a negative cash flow or you want to increase positive net cash flow, the only way to do it is to assess your spending habits and adjust them as necessary. By using personal financial statements to become more aware of your spending habits and net worth, you'll be well on your way to greater financial security.


Read more: http://www.investopedia.com/articles/pf/08/evaluate-personal-financial-statement.asp#ixzz28JcbWX2o

Monday 5 December 2011

Statement of Owners' Equity (Statement of Retained Earnings)

The equity statement explains the changes in retained earnings.

Retained earnings appear on the balance sheet and most commonly are influenced by income and dividends.  The Statement of Retained Earnings therefore uses information from the Income Statement and provides information to the Balance Sheet.

The following equation describes the equity statement for a sole proprietorship:

Beginning Equity
+ Investments
- Withdrawals
+ Income
----------------
= Ending Equity

For a corporation, substitute "Dividends Paid" for "Withdrawals".  The stockholders' equity in a corporation is  calculated as follows:

Common Stock (recorded at par value)
+ Premium on Common Stock (issue price minus par value)
+ Preferred Stock (recorded at par value)
+ Premium on Preferred Stock (issue price minus par value)
+ Retained Earnings
------------------------------------------------------------
= Stockholders' Equity


Note that the premium on the issuance of stock is based on the price at which the corporation actually sold the stock on the market.  Afterwards, market trading does not affect this part of the equity calculation.  Stockholders' equity does not change when the stock price changes!




How to Analyze a Banks Financial Statement

Understanding Bank Financial Statements








Understanding bank financial statements is easy when you go through each statement slowly. The three main financial statements are the income statement, balance sheet and cash flow. A bank’s financial statement is similar to any other financial statement. These statements give you a snapshot of how the bank is doing financially.





 

Instructions

1  Understand financial statements by reviewing terms related to these statements. There are three       main types of bank financial statements: the income statement, the balance sheet and the cash flow statement. To get a thorough understanding of financial statements, do some research online to familiarize yourself.

    • 2
      The bank income statement shows total revenues, total expenses and total tax. Notice that this statement starts with revenues, subtracts total expenses and then subtracts taxes. Go through the revenues, expenses and tax; you’ll notice many items within those groups.
    • 3
      The balance sheet lists the bank’s total assets, total liabilities and owner’s equity. The formula for the bank’s balance sheet is “assets” minus “liabilities” is equal to “owner’s equity.” The owner’s equity means the value of the bank owner's ownership of the bank.
    • 4
      The bank’s cash flow statement is a snapshot of its cash operations. This is a summary of operation activity cash, investing activity cash, finance activity cash and net cash change. This summary traces cash in-flow and cash out-flow.
    • 5
      Review the bank’s statement of owner’s equity. This statement records the prior equity, and then adjusts it with investments, withdrawals and income to get the final equity.


Read more: Understanding Bank Financial Statements | eHow.com http://www.ehow.com/how_4557967_understanding-bank-financial-statements.html#ixzz1fY6FKAwv

http://www.ehow.com/how_4557967_understanding-bank-financial-statements.html






How to Analyze a Banks Financial Statement






Related Searches:
A bank's financial statements are composed of three sections: the balance sheet, income statement and cash flow statement. The financial statements of a bank are complex because banks sell diverse financial products and services, and, they undertake their own financing and investment activities. However, once you learn the basics of reading financial statements---whether for a bank or another type of business---you'll understand what all the numbers mean.




Difficulty:
 
Challenging

Instructions

    • 1
      Start with the balance sheet which shows the value of what the bank owns or money that is owed to the bank (assets), the amount of money that the bank itself owes (liabilities), and the amount of money invested by shareholders into the bank (shareholder's equity) at a specific point in time. An easy way to remember the data on the balance sheet is: assets = liabilities + shareholder's equity.
      The assets for a large commercial bank, for example, can be extensive. The biggest line item is typically its loans and leases which are made to consumers, businesses and institutions. Be sure to read the summary notes that follow the financial statements to find more details about each of the bank's assets.
      Review the liabilities section which includes the bank's deposits made by its customers as well as the bank's short- and long-term debt which are loans, lines of credits and notes that the bank has less than one year (short-term) or more than one year (long-term) to pay back.
      The final section of the balance sheet to review is the shareholder's equity composed of capital stock plus retained earnings. Capital stock is the total amount of money shareholders have invested in the bank's stock. Retained earnings are the earnings that the bank has not paid out yet as dividends to its shareholders.
    • 2
      Refer to the income statement which provides information on the bank's profitability. It covers a specific period of time and details income from the bank's loans, lease financing, securities available for sale and other items. Like consumers and businesses, banks themselves borrow money to cover their own expenses and maximize profits. The last line of the income statement---the net income---shows the bank's total profits after all expenses and taxes have been paid.
    • 3
      Review the cash flows statement which tracks a bank's cash inflows and outflows over a specific period of time. Cash comes in and goes out of a bank from its operating, investing and financing activities. The cash flow statement will show the beginning cash balance and the ending cash balance after reporting all the bank's deposits (cash inflows) and payments (cash outflows).
    • 4
      Calculate key profitability, liquidity, activity and solvency ratios to assess a bank's overall performance. You can download a free template of these ratios from Microsoft Office Online (http://office.microsoft.com/en-us/templates/). Use data from the bank's current and past financial statements to calculate and compare these ratios.
      Try comparing the bank's ratios to composite ratios for other banks from Standard & Poor's Indices listings (http://www.standardandpoors.com/indices/main/en/us/). When you calculate and compare ratios, you'll get a summary of the bank's financial health and its performance relative to the competition.


Read more: How to Analyze a Banks Financial Statement | eHow.com http://www.ehow.com/how_5973660_analyze-banks-financial-statement.html#ixzz1fY7IWIBu

The 4 Financial Statements

http://www.quickmba.com/accounting/fin/statements/

Balance Sheet
Income Statement
Statement of Owner's Equity
Statement of Cash Flows

QuickMBA
Knowlege to Power Your Business
http://www.quickmba.com/site.shtml

Monday 21 June 2010

Finding great companies: What you want to see on their financial statements?

If you're committed to finding great companies and investing in them, it is time to state clearly what you should actively seek out on financial statements.  Here now is what you should hope to find when you're studying the report of a company that you're considering for investment.  


What you want to see on a balance sheet?

1.  Lots of Cash

  • Cash-rich companies don't have trouble funding growth, paying down debts, and doing whatever they need to build the business.  
  • Increasing cash and equivalents is good.


2.  A low Flow Ratio


Flow ratio
=  (Current assets - Cash) / (Current Liabilities - Short term Debt)
=  Noncash Current Assets / Noncash Current Liabilities

Ideally, a company's flow ratio is low.  Once cash is removed from current assets, we are dealing almost exclusively with accounts receivable and inventories.  In the very best businesses, these items are held in check.  Inventories should never run high, because they should be constantly rolling out the door.  Receivables should be kept as low as possible, because the company should require up-front payments for its products and services.

So we certainly want the numerator of the equation (current assets minus cash) to be held low.

What about the denominator (current liabilities minus short-term debt)?  Rising payables indicate one of two things:

  • either the company cannot meet its short-term bills and is headed for bankruptcy, or 
  • the company is so strong that its suppliers are willing to give it time before requiring payment.  
You can be sure that companies in the latter category use their advantageous position to hand on to every dollar they can.   Again, think of every unpaid bill as a short-term, low-interest or interest-free loan.  If a company has plenty of cash to pay down current liabilities but doesn't, it is probably managing its money very well.  Those are the companies that we are looking for.

Ideally, we like to see this flow ratio sit low.  The very best companies have:  (1) Plenty of cash  (2)  Noncash current assets dropping (inventories and receivables are kept low) and (3)  Rising current liabilities (unpaid bills for which cash is in hand).

You'll prefer the flow to be below 1.25, which would indicate that the company is aggressively managing its cash flows.

Inventories are down, receivables are down, and payables are up.  This is a perfect mix when a company has loads of cash and no long-term debt.  Why?  Because it indicates that while the company could (1) afford to pay bills today and (2) doesn't have to worry about rising receivables, they are in enough of a position of power to hold off their payments and collect all dues up front.

When the flow ratio is high, another red light whirs on the balance sheet.

It must be noted here, however, that larger companies generally have lower flow ratios due to their ability to negotiate from strength.  Thus, don't penalize your favorite dynamically growing small-cap too much for a higher flow ratio.


3.  Manageable debt and a reasonable debt-to-equity ratio

Investors have very different attitudes toward debt.  Some shun it, choosing to not invest in companies with any or much debt.  This is fine and can result in highly satisfactory investment performance results.  But debt shouldn't be viewed as completely evil.  Used properly and in moderation, it can help a company achieve greater results than if no debt is taken on.

Debt can be good for companies too.  Imagine a firm that has a reliable stream of earnings.  Let's say that it raises $100 million by issuing some corporate bonds that pay 8 percent interest.  If the company knows that it earns about 12 percent on the money it invests in its business, then the arrangement should be a very lucrative one.

Note, though, that the more debt you take on, the greater your interest expense will be.  And this can eat into your profit margins.  At a certain point, a company can have too much debt for its own good.  Another feature of debt (or 'leverage') is that it magnifies gains and losses (just as buying stock on margin means that your gains or losses will be magnified).  Debt, like anything, is best taken in moderation.

To finance their operations, companies need sources of capital.  Some companies can survive and grow simply on the earnings they generate.  Others issue bonds, borrow from banks, issue stock, or sell a chunk of the company to a few significant investors.  The combined ways that a company finances its operations is called its "capital structure."  If you take the time to evaluate a company's debt, it could be worth your while.  Properly managed debt can enhance a company's value.

When you calculate debt-to-equity ratios for your companies, remember that there really isn't a right or wrong number.  You just want to make sure that the company has some assets on which to leverage its debt.  To that end, look for low numbers, ideally.  A debt-to-equity ratio of 0.05 isn't necessarily better than one of 0.15, but 0.65 is probably more appealing than 1.15.  You should also evaluate the quality of the debt and what it's being used for.  If you see debt levels spiking upward, make sure you research why.  Certainly, long-term debt can be used intelligently.  But in our experience, the companies in the very strongest position are those that don't need to borrow to fund the development of their business.  We prefer those companies with a great deal more cash than long-term debt.



Are any of our balance sheet guidelines hard-and-fast rules?  No.

We can imagine reasonable explanations for each.

  • A company can run inventories very high relative to sales in a quarter, as they prepare for the big Christmas rush, for example.  So, inventories may be seasonally inflated (or deflated) in anticipation of great oncoming demand.
  • And accounts receivable may be a tad high simply by virtue of when a company closed out its quarter.  Perhaps, the very next day, 75 percent of those receivables will arrive by wire transfer.  Here, the calendar timing of its quarterly announcement hurt your company.
  • Rising payables can also be a very bad thing.  If the company is avoiding short-term bills because it can't afford to pay them, look out!
  • Finally, flow ratios can run high for all the reasons listed above.


Having qualified our assertions, we still believe that the best businesses
  • have such high ongoing demand that inventories race out the door, 
  • product distributors pay for the merchandise upfront, 
  • the company has enough cash to pay off payables immediately but doesn't, and 
  • future growth hasn't been compromised by present borrowing.  

Look to companies like Coca-Cola and Microsoft to find these qualities fully realised.


What you want to see on the income statement?

1.  High Revenue Growth


You will want to see substantial and consistent top-line growth , indicating that the planet wants more and more of what your company has to offer.  Annual revenue growth in excess of 8 - 10 percent per year for companies with more than $5 billion in yearly sales is ideal.  Smaller companies ought be growing sales by 20 - 30 percent or more annually.

2.  Cost of Sales under wraps


The Cost of sales (goods) figure should be growing no faster than the Revenue line.  Ideally, your company will be meeting increasing demand by supplying products at the same cost as before.  In fact, best of all, if your company can cut the cost of goods sold during periods of rapid growth.  It indicates that the business can get its materials or provide its services cheaper in higher volume.  Where cost of goods sold rose outpacing sales growth, a red light just blinked from the income statement.


3.  Gross margin above 40%


We prefer to invest in companies with extraordinarily high gross margin - again, calculated by (a) subtracting cost of goods sold (cost of sales) from total sales, to get gross profit, then (b) dividing gross profit by total sales.

A gross margin above 40% indicates that there is only moderate material expense to the business.  It is a "light" business.  We like that.

Not all businesses are this light, of course.  Many manufacturing companies have a hard time hitting this target, as do many retailers.  Does that mean you should never invest in them?  No.  Does it mean you should have a slight bias against them in favour of higher-margin companies, all other things being equal?  Yes.

4.  Research and Development costs on the rise

Yes, we actually want our companies to spend more and more on research every year, particularly those in high technology and pharmaceuticals.  This is the biggest investment in the future that a company can make.  And the main reason businesses spend less on R&D one year than the last is that they need the money elsewhere.  Not a desirable situation to be in.  Look for R&D costs rising.  Of course, though, not all companies spend much on R&D.  A kiss is still a kiss, a Coke is still a Coke.

Generally, the best way to go about measuring R&D is as a percentage of sales.  You just divided R&D by revenue.  You want to see this figure trend upward, or at least hold steady.

5.  A 34% plus tax rate


Make sure that the business is paying the full rate to the government (Uncle Sam).  Due to previous earnings losses, some companies can carry forward up to a few years of tax credits.  While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth.  If companies are paying less than 34% per year in taxes, you should tax their income at that rate, to see through to the real growth.

6.  Net profit margin above 7% and rising.

How much money is your company making for every dollar of sales?  The profit margin - net income dividend by sales - tells you what real merit there is to the business.

We prefer businesses with more than $5 billion in sales to run a profit margin above 7 percent, and those with less than $5 billion to sport a profit margin of above 10 percent.  Why go through all the work of running a business if out of it you can't derive substantial profits for your shareholders?

Another way of thinking about this is that in a capitalistic world, high margins - highly profitable businesses - lure competition.  Others will move in and attempt to undercut a company's prices.  So companies that can post high margins are winning; competition is failing to undercut them.  As with gross profits above, some industries do not lend themselves to a high profit margin.   For example, a certain company is unlikely to ever show high profits, but it remains a wonderful company.


What you want to see on the cash flow statement?

Net cash provided by (used in) operating activities is positive or negative.

If a company is cash flow negative, it means that these guys are burning capital to keep their business going.  This is excusable over short periods of time, but by the time companies make it into the public marketplace, they should be generating profits off their business.

If a company you are studying is cash flow negative, it's critical that you know why that's occurring.
  • Perhaps it has to ramp up  inventories for the quarter, or had a short, not-to-be-repeated struggle with receivables.  
  • Some companies are best off burning capital for a short-term period, while they ramp up for huge business success in the future.  
  • But if the only reason you can find is that their business isn't successful and doesn't look to be gaining momentum, you should steer clear of that investment.


Summary

You now have a fine checklist of things to look for (and hope for) on the balance sheet, income statement, and statement of cash flows.  Few companies are ideal enough to conform to our every wish.

The best businesses show financial statements strengthening from one quarter to the next.

For smaller companies with great promise and for larger companies hitting a single bad bump in the road, shortcomings in the financial statements can be explained away for a brief period.

But when you do accept these explanations, be sure you're getting the facts.  You want to thoroughly understand why there has been a slipup and do your best to assess whether or not it's quickly remediable.

We have, up to until now,  merely outlined the ideal characteristics, without ever putting a price tag on them.  Make sure you've mastered these basic concepts before fishing for some companies.