PM11 Roberts

8/4/2019 PM11 Roberts

1/16

How to Read a

Financial Statement

National Press FoundationApril 2011


2/16

Why This Matters

S&L Crisis = FIRREA Enron, WorldCom = SOX

2007-2009 Financial Crisis = TARP

Understanding Financial StatementsAllows You to Ask Smarter Questions,

Engage Management in Higher LevelDialogue and Write More Powerful Stories


3/16

Rules of the Game

Generally Accepted Accounting Principles Financial Accounting Standards Board

(FASB), Norwalk, Conn. est. 1973 sets

U.S. GAAP 1934 Securities Exchange Act requires

publicly traded companies to file audited

financial reports. Enforced and regulated by the Securities

and Exchange Commission (SEC)


4/16

Why it really is a Game

Disclosure in a competitive environment Pressure to manipulate financial

statements

Keeping up with high growthindustries/markets

Investor Pressure

Short-term, quarterly focus on gains

Dependence on share price for financing

Management greed/compensation


5/16

Tools for journalistswhere to find information

Annual Report to Shareholders 10-K annual reports

10-Q quarterly reports

8-K material event filing Proxy statements

Earnings calls

Analyst reports Form 144 - Insider transactions

Annual meeting


6/16

10-K Annual Report

Income Statement Balance Sheet

Management Discussion and Analysis

Structure of Industry and Competition

Footnotes

Auditors statement

Statement of Cash Flows

Liquidity Position

Contingencies


7/16

10-Q Quarterly Report

Quarterly earnings statement Due within 45 days

Unaudited

Compare to the press release

Focus on income from continuingoperations before transactions: What EPS

would have been


8/16

8-K Filing material events

Notifies investors of material events Hire, fire, departure of top officers

Acquisition or sale

Change in control

Plant shutdowns, layoffs

Subsidiary sales, acquisitions

Triggering events (loan obligations)

Bonds, stock sales, financing

Lawsuits, bankruptcies etc.


9/16

Proxy statements

Relates to the election of boards ofdirectors at annual meeting

Allows shareholders to vote by proxy,

i.e.; mail, on issue facing the company Includes #s on management

compensations, stock options.

Auditor changes Insights into CEO incentives and board

relationships


10/16

Income Statement (Profit and Loss,P&L, or the Bottom Line)

Gross Revenue- Cost of sales, administration

- Depreciation, amortization

= Operating profit

+ Other revenues other expenses

= Taxable income

- Income taxes

= Net income

- Dividends = profits reinvested


11/16

Balance Sheet

Assets - Liabilities = Equity

Liabilities + Equity = Assets?

Equity / # shares outstanding = book valueper share

Compare to stock price; What is marketsaying?


12/16

Cash Flow real money vs. accrual

Income from operations (adjust for) +/- non-cash expenses/revenue

+/- changes in working capital

= Net cash from operations

+/- Cash from investing activity

+/- Cash from financing

= Net Cash flow

Change in cash = beginning - ending cash


13/16

Getting Past the Snapshot Effect

Financial reports reflect financial conditionon four days a year.

Balance sheets expand or contract during

the time in between reporting periods. Revenue recognition varies

Use spreadsheet to stack historic data for

long-term perspective Look for economic/macro trends

Access management strategy vs context


14/16

Ratio Analysis/Monetary Measures

ROE = Return on Equity, income/equity ROA = Return on Assets, income/assets

EPS = Earnings Per Share, $$s/# shares

Debt Ratio = Debt/Assets

COGS = Cost Goods Sold, Cost Sales

EBITDA = Earnings before interest, taxes,depreciation and amortization

Compare to other competitors and industryaverages to benchmark performance


15/16

How to Put it All Together

What is the companys business, mission? How much cash does it really make?

What are its resources?

Where is it getting financing from?

Where is it investing in its business?

Is it profitable vs industry peers?

What do the accounting footnotes say?

What are the key ratios?

What does management say?


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How to Read a

Financial Statement

National Press FoundationApril 2011

Documents

PM11 Roberts