Corporate Finance 101: Financial Statement Analysis & Ratios

Name: Corporate Finance 101: Financial Statement Analysis & Ratios
Rating: 4.4 (176 reviews)

A zoom-in, zoom-out, connect-the-dots guide to understanding financial statements, and analysing companies

Last updated 8/2016

English

What you'll learn

Interpret financial statements - the Balance Sheet, Income Statement and Statement of Cash Flows
Parse SEC filings such as the 10K and 10Q to understand the business model of any company entirely from its investor filings
Calculate ratios in all major categories: liquidity, leverage, turnover, profitability and valuation
Apply Dupont's Identity to see whether a company's stock returns are driven by operational efficiency, asset efficiency or leverage
Calculate the sustainable rate of growth at which a company can grow without external financing

12 sections • 43 lectures • 8h 1m total length

You, Us & This Course2:08
What this course is about, and what you will get from it.

Sole Proprietorship9:45
Why do people work? And why, sometimes, a lone hand is a cool one.
Partnership6:08
Partnerships - general and limited - are important to understand (especially if you encounter any private-equity folks at cocktail parties)
The Corporation13:47
Artificial legal person, that's what a corporation is.
Public and Private6:37
Agency Problems and Corporate Governance12:37
Principal-agent conflicts of interest are as old as the hills. See how auditors and the government (capital market regulators) get involved to keep things clean.

The Balance Sheet5:33
A tally of assets and liabilities, and what's left over is hopefully positive - that's what a balance sheet is.
Assets14:54
Liabilities3:50
Future obligations that will have to be met by the corporation - these are called liabilities.
Shareholder's Equity10:10
Shareholder's equity is what is left for the owners, the shareholders. This includes both invested capital and retained earnings.
Balance Sheet Case Studies: Facebook, Twitter, LinkedIn13:10
Let's immediately put our theoretical knowledge to work studying 3 comparable balance sheets.

Income Statement16:18
Revenue - Costs = Net Income. Conceptually simple, but the devil is in the details!
The Net Income Waterfall13:07
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.
Statement of Comprehensive Income9:45
Recurring or non-recurring? This is an important distinction about net income that folks need to know about.
Income Statement Case Studies6:30
Again let's immediately put our knowledge to work - see how powerful Facebook's business is, and how shaky Twitter is.

Statement of Cash Flows12:34
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.
The Direct and Indirect Methods11:58
Cash flows from operations, from financing and from investing: see how these are computed in the indirect and direct methods.
Cash Flow Statement Case Studies3:28
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.
Working with Cash Flows - I15:44
Working with Cash Flows - II13:57

Ratios Introduced5:00
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, Leverage and Efficiency12:47
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!
Profitability and Valuation5:13
Profits and valuations - return-on-equity and return-on-assets. We are getting to the heart of corporate finance now.

Dupont's Identity9:32
How can a firm make money for its shareholders? Three possible ways: profitability, leanness, and leverage. That's what Dupont's identity tells us.
External Financing & The Sustainable Rate of Growth10:55
How fast can a company grow if it forgoes external financing? Every startup should ask itself this.
Common Accounting Shenanigans10:06
Cheating on books is as old and as common as cheating on spouses. Auditors and the SEC are watching though, remember that.

This course assumes no prior knowledge of accounting or finance
The investor relations sections of Facebook, Twitter and LinkedIn will be used, but the course will discuss how to access and use these public sites

This is a zoom-in, zoom-out, connect-the-dots tour of Financial Statement Analysis

Let's parse that

'connect the dots': Financial Statement Analysis gets a bad rep because its hard to connect the nitty-gritty of the financial statements to the company as a whole. This course makes a serious effort to do exactly that.
'zoom in': Getting the details is very important in corporate finance - a small typo, or a minor misunderstanding can cost a company big. This course gets the details right where they are important.
'zoom out': Details are important, but not always. You probably don't care about the nitty gritty of accounting for contingent liabilities if you don't know what accounts payable are. This course knows when to switch to the big picture.

What's Covered:

Corporate Finance Introduced: partnerships, proprietorships and the corporation
The Agency Problem: How auditors, the board of directors and the capital markets regulator play a role
Financial Statements: Balance Sheet, Income Statement, Statement of Comprehensive Income and Cash Flow Statement at exactly the right level of detail
Ratios: Five important types of ratios: liquidity ratios, leverage ratios, turnover ratios, profitability ratios and valuation ratios
Dupont's Identity: Return-on-equity can be decomposed into 3 elements: profits, asset-leanness and leverage.
External Financing Needed (EFN) and the Sustainable Rate of Growth: How fast can a company grow if it chooses to forgo external funding? Every startup should know this, really.
Common Accounting Shenanigans: The playbook of financial statement cheats has been studied by auditors and regulators - learn from history so you are not condemned to repeat it.

Case Studies:

Understanding a company entirely from its investor filings

Facebook: Fast-growing and profitable, this is the dream stock right now.
LinkedIn: Versatile, but struggling to break through - the jury seems out on LinkedIn
Twitter: Bleeding red and slowing growth - Twitter seems to be in trouble.