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Lecture Series #1. Understanding Financial Statements & Analysis. Chris Droussiotis October 2011. Table of Contents. Accounting Definitions, Terms and Concepts Using Financial Statements Financial Ratio Analysis.
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Lecture Series #1 Understanding Financial Statements & Analysis Chris Droussiotis October 2011
Table of Contents • Accounting Definitions, Terms and Concepts • Using Financial Statements • Financial Ratio Analysis These slides could be obtain via the Instructor’s Web page at www.celeritymoment.com
Accounting Definitions and Concepts A = L + NW A = Assets L = Liabilities NW = Net Worth Own Owe Keep (Value Creation) • Government • Deficit or Surplus How did you pay for the Assets that you own • Similar Concepts in Other Areas of Finance: • Consumer finance: Value of the House = Mortgage + Equity • Corporation Value: Enterprise Value = Net Debt + Equity • Investments: Value of the Investment: Margin Loan + Equity
Accounting Definitions and Concepts Book Value Vs Market Value • Book Value • Accounting • Fixed Assets • Corporate Taxation • Market Value • Finance • Financial Assets • Investment Taxation
Accounting Definitions and Concepts Income Vs Cash The Perfect World: Every business is run like a lemonade Stand
Accounting Definitions and Concepts Income Vs Cash Not So Perfect World: The world of IOUs
Income Statement • Measurement of Profit and Loss over a Period of Time • Top Line to Bottom Line • Revenue (Sales) Less Expenses = Profit or Loss
Balance Sheet Statement • It shows us on a snap shot the Wealth of the Company • The statement is set-up in Order of Liquidity
Cash Flow Statement • It shows the Company’s Cash Inflow and Outflow over a period of time • Differences between Income Statement and Cash Flow Statement • Timing Differences (Working Capital Activities) • Capital Expenses Vs Operating Expenses (Investment Activities) • Financing Expenses not included in the Income Statement (Financing Activities) • Represents the changes from last Year’s Balance Sheet to this Year’s Balance Sheet • Asset goes Up = Cash Negative • Asset goes down = Cash Positive • Liability goes up = Cash Positive • Liability goes down = Cash Negative • Owner’s Equity goes up = Cash Positive • Owner’s Equity goes down = Cash Negative
Cash Flow Statement Adjusting Income to Cash
Cash Flow Statement Working Capital Activities
Cash Flow Statement Investment Activities
Cash Flow Statement Financing Activities
Cash Flow Statement Recap Timing Differences (Working Capital Activities) Investment Activities Financing Activities
Financial Analysis • Management Discussion and Analysis (MD&A) • Equity & Bond Research – Wall Street Analysts • The Financial Statements could be used by analysts to project the Company’s performance and valuation • For an effective performance of the Company, you need to ask the three following questions: • How is the Company doing versus Last Year • How is the Company doing versus its competitors / piers/ market • How is the Company doing versus expectations
Financial Ratio Analysis • Trend Analysis
Financial Ratio Analysis • Liquidity Ratio • How well the Company manages Cash
Financial Ratio Analysis • Solvency Ratio • How well the Company manages Debt
Financial Ratio Analysis • Activity and Operating Ratios • It measures productivity and efficiency for running the business Please note that there are a lot of ratios establish by specialization (i.e. for a Hotel company is Occupancy Rate or for a Cable company is revenue per subscriber)
Financial Ratio Analysis • Profitability Ratio • How profitable is the company