This is a zoom-in, zoom-out, connect-the-dots tour of Financial Statement Analysis
Let's parse that
Understanding a company entirely from its investor filings
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Why do people work? And why, sometimes, a lone hand is a cool one.
Partnerships - general and limited - are important to understand (especially if you encounter any private-equity folks at cocktail parties)
Artificial legal person, that's what a corporation is.
A tally of assets and liabilities, and what's left over is hopefully positive - that's what a balance sheet is.
Future obligations that will have to be met by the corporation - these are called liabilities.
Shareholder's equity is what is left for the owners, the shareholders. This includes both invested capital and retained earnings.
Let's immediately put our theoretical knowledge to work studying 3 comparable balance sheets.
Revenue - Costs = Net Income. Conceptually simple, but the devil is in the details!
Follow the convoluted waterfall that takes us from revenue to net income. EBITDA, operating profit, and gross profit are some of the stops along the way.
Recurring or non-recurring? This is an important distinction about net income that folks need to know about.
Again let's immediately put our knowledge to work - see how powerful Facebook's business is, and how shaky Twitter is.
Cash is key - a firm can go bankrupt despite significant assets, and significant profits, if it runs out of cash. That's why we need a statement of cash flows distinct from the income statement and balance sheet.
Cash flows from operations, from financing and from investing: see how these are computed in the indirect and direct methods.
Facebook has a ferociously profitable business, that generates plenty of cash from operations. The firm is aggressive about re-investing this into assets for the future.
Once we have financial statements, what do we do with them? Use them to analyse companies of course! And there are 2 important techniques for doing this: time-series and peer-group (cross-sectional) analysis.
Liquidity ratios focus on short-term solvency, leverage ratios focus on long-term solvency and turnover ratios focus on efficiency. There is a natural tension between efficiency and solvency!
Profits and valuations - return-on-equity and return-on-assets. We are getting to the heart of corporate finance now.
How can a firm make money for its shareholders? Three possible ways: profitability, leanness, and leverage. That's what Dupont's identity tells us.
How fast can a company grow if it forgoes external financing? Every startup should ask itself this.
Cheating on books is as old and as common as cheating on spouses. Auditors and the SEC are watching though, remember that.
Highly profitable, and growing like crazy: that's why everyone loves Facebook's stock.
A diversified business that might be huge - but also might turn into an also-ran. The jury is out on LinkedIn.
The jury definitely seems to be in on Twitter, and its not looking good.
Loonycorn is us, Janani Ravi, Vitthal Srinivasan, Swetha Kolalapudi and Navdeep Singh. Between the four of us, we have studied at Stanford, IIM Ahmedabad, the IITs and have spent years (decades, actually) working in tech, in the Bay Area, New York, Singapore and Bangalore.
Janani: 7 years at Google (New York, Singapore); Studied at Stanford; also worked at Flipkart and Microsoft
Vitthal: Also Google (Singapore) and studied at Stanford; Flipkart, Credit Suisse and INSEAD too
Swetha: Early Flipkart employee, IIM Ahmedabad and IIT Madras alum
Navdeep: longtime Flipkart employee too, and IIT Guwahati alum
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