Python for Corporate Finance and Investment Analysis

Python availability in Excel introduces a fresh realm of possibilities for data analysis that was once primarily accessible to data scientists and developers. Now, within the comfort of your well-known spreadsheet environment, you can tap into the capabilities of Python. Check out Chapter 11 "Getting Started with Python in Excel"

Excel is a versatile and indispensable tool for finance professionals. Its importance cannot be overstated, as it is used in a wide range of financial tasks, from data analysis to financial modeling and reporting.

1. Financial Analysis and Reporting: Excel enables finance professionals to sort, analyze, and visualize data to identify trends, perform variance analysis, and forecast future financial scenarios. It supports using pivot tables, advanced formulas, and various graphing tools, which are crucial for creating detailed financial reports.

2. Financial Modeling: Excel is widely used for financial modeling, allowing analysts to build models that can predict income, budgeting, cash flow, and other financial projections. Using advanced functions and creating flexible, dynamic models is critical to making informed business decisions.

3. Excel Proficiency is a Game-changer for finance professionals, significantly boosting productivity by saving time. The ability to automate tasks with macros, handle complex calculations with ease, and manage large datasets efficiently are just a few ways Excel streamlines financial tasks.

4. Excel is not just a tool; it's a universal language in the finance industry. Mastery of Excel is often a prerequisite for many finance roles, making it an indispensable skill for job proficiency and career advancement.

5. Decision Making: Excel helps finance professionals in decision-making processes by providing a platform to work through various financial scenarios and analyze potential outcomes. What-if analysis and sensitivity tables are instrumental in this regard.

6. Accuracy and Precision: Excel's precision in handling financial data is critical. A single error can result in significant financial discrepancies; thus, the ability to use Excel to manage and cross-check numbers accurately is vital.

7. Integration and Compatibility: Excel can integrate with many business applications and databases, making it an effective tool for consolidating information from various sources for financial analysis and reporting.

Knowing Excel in finance is not just about understanding the basic features; it involves a deep understanding of its advanced capabilities, which are essential in the sophisticated world of finance.

Excel proficiency is a foundational skill that enables finance professionals to perform their roles effectively and efficiently, whether running regressions, building a discounted cash flow model, or analyzing complex datasets.

Download the MBA ASAP Ultimate Excel Handbook and level up your skill set.

Vlookup vs. Hlookup vs Xlookup

Learn the most popular Excel functions and which ones to use when

Lookup functions are REALLY popular in Excel.

Because they allow you to “lookup” a value from a dataset based on the criteria that you enter.

Most people only focus on Vlookup without realizing that there is a far more powerful lookup function called Xlookup.

Let’s explore these three lookup functions and become a pro:

VLOOKUP

How it works → Searches VERTICALLY in the first column of a specified range and returns a value in the same row from a column you specify.

Syntax → =VLOOKUP(lookup_value, table_array, col_index_num, [range_lookup])

Pros →Easy to use for vertical lookups, Supported in all versions of Excel.

Cons → Limited to vertical searches, Searches must start in the first column of the range.

My take → VLOOKUP is probably the most common lookup function, but it’s sooo limited. Learn to ditch this function and focus on XLOOKUP!

HLOOKUP

How it works → Searches HORIZONTALLY in the first row of a specified range and returns a value in the same column from a row you specify.

Syntax → =HLOOKUP(lookup_value, table_array, row_index_num, [range_lookup])

Pros → Useful for horizontal lookups, Supported in all versions of Excel.

Cons → Limited to horizontal searches, Inefficient with large datasets.

My take → HLOOKUP isn’t as popular as VLOOKUP but is very similar. As mentioned above, while this may get the job done, there is a bigger and better option with XLOOKUP.

XLOOKUP

How it works → Searches for a value in an array or range in EITHER DIRECTION and returns a value from a corresponding array or range.

Syntax → =XLOOKUP(lookup_value, lookup_array, return_array, [if_not_found]

Pros → Can search in any direction, Allows for the return of an array, and provides an option for a default value if no match is found, which is very efficient.

Cons → Only available in Excel for Office 365, Excel 2019, and later versions, can be complex.

My take → XLOOKUP solves all the issues that VLOOKUP and HLOOKUP have, and it will gradually take over the Excel lookup universe.

What makes this even more powerful is nesting another XLOOKUP inside your XLOOKUP, which allows you to find the value with both your X and Y axes.

Accounting is the procedure of data entry and recording, summarizing, analyzing, and reporting financial data. The end product of accounting is the three financial statements: Income Statement, Balance Sheet, and Cash Flow Statement.

FIVE BASIC ACCOUNTING PRINCIPLES:

1: Revenue Recognition:

→ Revenue is recorded at the time of the transaction.

2: Matching Principle:

→ Assets are recorded at their acquisition cost.

3: Historical Cost:

→ Fiscal Year Income is compared with Calendar Year Expense.

4: Full Disclosure:

→ Full disclosure of all relevant info is made available.

5: Objectivity Principle:

→ Information in books should be true, relevant, & accurate.

5 CATEGORIES OF ACCOUNTING:

1: Assets:

→ All Tangible & Intangible items owned by the company.

2: Liabilities:

→ Amounts the company owes to others.

3: Equity:

→ Net Worth of Entity: Assets - Liabilities

4: Expenses:

→ Amount paid purchases made in business.

5: Income:

→ Amount earned by the company from the sale of goods.

JOURNAL VS LEDGER:

→Journal Entries consist of Debits & Credits, the totals of which should be equal

→Journal entries are then transferred to the appropriate Ledger Accounts

FINANCIAL STATEMENTS:

1: Income Statement:

→ Shows profit or loss during the period.

2: Balance Sheet:

→ A company's assets, liabilities, and equity at a point in time.

3: Statement of Cash Flow:

→ Shows the inflow and outflow of cash during the period.

DOUBLE ENTRY SYSTEM

→ Each Accounting Entry will have two sides - Debit and Credit.

THREE FIELDS OF ACCOUNTING:

→ Financial Accounting: Preparing the Financial Statements.

→ Managerial Accounting: Prepare reports for internal use.

→ Cost Accounting: Measure the performance of resources.

The basics of accounting

This PDF will teach you everything you need to know

Here's what you'll learn:

- Accounting Cycle & Accounting Equation

- List of Accounts and Its Classification

- Accounting Principles

- Journal Entries, Adjusting Entries, & Closing Entries

- Financial Statements

13 Accounting Principles

Accounting is the language of business.

If you want to read financial statements, you MUST understand these 13 principles:

ACCOUNTING PRINCIPLES

→ The rules, benchmarks, and procedures in the accounting field companies should follow while reporting financial statements. In the United States, the common set of accounting standards is GAAP (Generally Accepted Accounting Principles).

ECONOMIC ENTITY

→The Owner & business are two different entities with separate liabilities.

REVENUE RECOGNITION

→ Revenue should be recognized using the accrual basis of accounting.

CONSERVATISM

→When there are two acceptable options for reporting, the less favorable option should be chosen.

CONSISTENCY

→The usage of methods and principles should be consistent until another method proves to be better.

HISTORICAL COST

→Assets should be recorded based on their original purchased value.

FULL DISCLOSURE

→All important information should be disclosed within the financial statements or as a footnote.

GOING CONCERN

→Business is assumed to carry on forever with no intention of liquidation.

MATCHING CONCEPT

→All debits should have a matching credit, and all credits should have a matching debit.

MATERIALITY

→Any information which will have a significant impact should be reported on the financial statements.

MONETARY UNIT

→Transactions that carry a monetary value should be recorded in terms of a monetary currency (Eg, Dollars)

RELIABILITY

→Transactions should only be recorded that can be proven & have significant evidence.

REVENUE TIMING

→ Revenues will be recognized at the time of the transactions regardless of whether payment has been made.

TIME PERIOD

→There should be a standardized time period for the reporting of the financial statements (Ex: Monthly, Quarterly, or Annually)

Do any of these principles need further explanation? If so, let me know in the comments section.

???????? ?? ?????????? ??????

This used to confuse me.

There's an easy way to distinguish them.

???????? ?????? ??? ?? ???????

?????????? ?????? ???'?

Here are some other noteworthy differences:

? ???????????? ??. ????????????:

- Tangible assets are depreciated over their useful life.

- Intangible assets are amortized over their useful life.

? ?????????:

- Valuation of tangible assets is generally based on cost or market value.

- Intangible assets valuation often relies on the income approach or market comparables.

? ????????:

- Tangible assets typically have a finite lifespan.

- Intangible assets can have an indefinite lifespan, depending on the asset type.

? ???? ?? ????????????:

- Tangible assets are more risky due to physical deterioration or technological advancements.

- Intangible assets face lower physical obsolescence risks but can be affected by changes in law, market demand, or technology.

? ?????????? ?????:

- Tangible assets are often used as collateral for loans due to their physical value.

- Intangible assets are less commonly used as collateral due to difficulty in valuation.

? ????????

- Tangible assets are acquired or constructed physically.

- Intangible assets are created through legal or intellectual effort.

Cost Accounting Formulas

This PDF teaches you everything you need to know

Here's what you'll learn:

- Total Cost (TC)

- Average Cost (AC)

- Marginal Cost (MC)

- Contribution Margin (CM)

- Gross Profit (GP)

- Break-Even Point (BEP)

- Return On Investment (ROI)

- Cost of Goods Sold (COGS)

- Overhead Allocation

- Cost Variance

- Price Variance

- Labor Efficiency Variance

- Predetermined Overhead Rate (POR)

- Economic Order Quantity (EOQ)

- Cost of Quality (COQ)

- Production Volume Variance

- Margin of Safety

- Availability

- Reorder Point

- Takt Time

GAAP vs non GAAP

If accounting is the language of business, as we often teach, understanding its high-level concepts is essential.

Yet, when listening to insiders or stock market veterans, they often use industry jargon and alphabet soup acronyms without explaining what each means.

In today’s lesson, we will tackle one of accounting’s most confusing terms, which is crucial to understand when going through a company’s financial statements: GAAP, which stands for generally accepted accounting principles.

GAAP accounting is a commonly accepted set of rules and procedures designed to govern corporate accounting and financial reporting within the United States.

GAAP rules were jointly established by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

GAAP rules are applied to profitable corporations (overseen by the FASB) and government and non-profit organizations (regulated by the GASB).

This raises an important question: Why do companies report non-GAAP results if GAAP rules are for corporations?

Non-GAAP refers to accounting practices that do not comply with the GAAP standards. As a result, these metrics aren’t audited and don’t have a standardized reporting format.

Many companies report non-GAAP results to shareholders (in addition to their GAAP results) to add important color and nuance to their numbers that the GAAP standard misses.

However, it’s important to note that non-GAAP numbers can also disguise weaknesses in a company’s results.

Therefore, a discerning investor must carefully comb through the numbers, comparing the GAAP with the non-GAAP results, to see an accurate picture of companies’ finances.

Welcome to the first section of this course: understanding financial statements.

Financial statements are the end product of accounting. Accounting can seem tedious, but it is the basis of business and investing. Double-entry bookkeeping is 500 years old and is one of the most significant technological inventions ever. The economic development it unleashed fueled the renaissance, the enlightenment, and the modern era.

Johann Wolfgang von Goethe rapturously described accounting this way: “Double-entry bookkeeping is one of the most beautiful discoveries of the human spirit.”

Understanding financial statements are the door to understanding accounting and business.

By the end of this short course, you will understand financial statements and open up a world of potential for your career and life.

You will probably look back over the following years and decades and see this as an inflection point in your destiny. 

Download the book here as a printable pdf or Kindle compatible file.

Let’s get started!

Understanding Financial Statements

Financial statements are essential tools that provide a clear picture of a business's or individual's financial activities. At their core, they serve as a report card detailing how money moves in and out.

Income Statement: Think of this like a monthly budget. It tracks money coming in (revenues) and money going out (expenses). The difference between the two gives the profit or loss. For individuals, it's akin to measuring salary against monthly expenses to determine savings.

Balance Sheet: This offers a snapshot of what a business owns and owes at a specific point in time. On one side, there are assets – everything the business owns that has value, like buildings, equipment, or even cash in hand. On the other side, there are liabilities (what the business owes to others) and equity (the owner's share). The fundamental rule is that assets will always equal the sum of liabilities and equity.

Cash Flow Statement: While the income statement might show a profit, it doesn't necessarily represent cash. This statement bridges the gap. It tracks actual cash moving in and out, divided into three categories: money from doing business (operations), money from buying or selling big items (investing), and money from loans or paying back loans (financing).

Business leaders, investors, and banks use these statements to understand a company's health. They help determine whether a business is growing, if it can pay its bills, and if it might be a good place to invest money. Public companies share these with the government for regulatory reasons, and private companies provide them to the government primarily for tax purposes.

The Most Important Finance Job

The most important set of tasks that a CFO (Chief Financial Officer) has is the oversight, management, and preparation of financial statements.  Financial reporting with financial statements happens regularly, at least every quarter and once a year for audited financials.  Once you complete a set of financial statements, you are working on the preparation of the next set. 

Becoming intimately familiar with financial statements and how they are interconnected and flow is the critical skill set for corporate finance.   

Financial statements also underlay Discounted Cash Flow analysis, NPV, IRR, and all the valuation techniques of finance.  We will now spend some time thoroughly understanding financial statements.

Intro to Financial Statements

• What are financial statements?

• The 3 Financial Statements:

• Income Statement

• Balance Sheet

• Cash Flow

  
  

Understanding Financial Statements   

When you have completed this section of MBA ASAP, you will have a solid understanding of Financial Statements and you will be able to draw meaningful conclusions from their contents.  This knowledge can be highly impactful for the quality of your career, job prospects, and life.   

Financial Statements are the basic language of money and business. Everyone should have a basic understanding of Financial Statements: what they are and what information they provide.  It’s a competency that can open up opportunities and vistas that are closed off otherwise.        

Executives like the CEO, COO, and CFO routinely share and discuss financial data with marketing, operations, and other direct reports and personnel within an organization.  They also compile and share financial information with stakeholders outside the firm such as bankers, investors and the media.    

But how much do you really understand about finance and the numbers? A recent investigation into this question concluded even most managers and employees don’t understand enough to be useful. Check out the quiz in this section to see how you stack up.  I will offer the quiz again at the end of the course so you will be able to gauge how your level of financial competency has improved.    

Three Main Financial Statements   

There are three main financial statements and they are linked together to provide a picture of the financial position and health of an enterprise. They represent the end product of accounting, meaning they are the reports generated by accounting covering all of the transactions of a company.   

The three basic financial statements are the   

• Balance Sheet: which shows firm's assets, liabilities, and net worth on a stated date   

• Income Statement: also called profit & loss statement or simply the P&L: which shows how the net income of the firm is arrived at over a stated period, and    

• Cash Flow Statement: which shows the inflows and outflows of cash due to the firm's activities during a stated period.    

Knowing how to read and understand financial statements is a business skill you can’t ignore. It can help working your way up the corporate ladder by communicating with others in your company and understanding the big picture.  It is also a useful skill in order to understand where your efforts and work can make the most impact.    

When you are thinking about possibly changing jobs and working for a company you can check their financials and make sure they are a healthy organization.  If you are considering starting your own company you will need to have financials prepared by your accountant in order to talk to investors, bankers and vendors.    

If you want to invest wisely in the stock market, analyze the competition or benchmark your performance, you can look up the financials of any publicly traded company at the Securities and Exchange Commission website’s’ EDGAR filings and get an idea of how they are doing.  Check out any public company’s most recent 10K filing there.  A 10K is the Annual Report of the company and its most important business and financial disclosure document.          

Next we will go over each of the financial statements individually and how they are interrelated.  You will find lots more information in the books and other downloadable documents that accompany this course.

Revenue = profit per unit sold X number of units sold

Pricing power. Charge more.

Silicon Valley legend Marc Andreessen was asked what he would put on a billboard. Marc said two words: "Raise Prices.

The number one thing – just the theme, and we see it everywhere – the number one theme that our companies have when they get really struggling is they are not charging enough for their product. It has become absolutely conventional wisdom in Silicon Valley that the way to succeed is to price your product as low as possible under the theory that if it's low-priced everybody can buy it and that's how you get the volume. And we just see over and over and over again people failing with that because they get in the problem we call too hungry to eat. They don't charge enough for their product to be able to afford the sales and marketing required to actually get anybody to buy it. And so, they can't afford to hire the sales rep to go sell the product. They can't afford to buy the TV commercial, whatever it is. They cannot afford to go acquire the customers."

The Income Statement

The basic structure and components of the Income Statement are reviewed in this section. The Income Statement is sometimes called the Profit and Loss Statement, or P&L for short.

The components of the Income Statement are:

• Revenue

• Expenses

• Net Income

• Profit

• Earnings

The Income Statement

The daily operations of a business are measured in the money that comes in as revenues, the money that goes out as expenses, the money that is retained as profit, the money that is invested in operational assets, and the money that is owed. It's all about the money. Financial statements follow the money.

The report that measures these daily operations of money in and money out over a period of time is the Income Statement.

Revenues minus Expenses equals Net Income.

The Income Statement can be summarized as Revenues less Expenses equals Net Income. Net Income simply means Income (Revenues) net (less) of Expenses. Net Income is also called Profit or Earnings.

The terms "profits," "earnings" and "net income" all mean the same thing and are used interchangeably. They are synonyms for the bottom line number on the Income Statement. Revenues are often called Sales and are represented on the top line.

You understand the dynamics of this concept intuitively. We always strive to sell things for more than they cost us to make or buy. When you buy a house, you hope it will appreciate in value so you can sell it in the future for more than you paid.

It's also the rule for stocks: buy low, sell high.

The same logic applies to having a sustainable business model in the long run. You can't sell things for less than they cost to make and stay in business for long. So if you own and run a sandwich shop, you had better make sure that you are selling the sandwiches for more than they cost you to make.

Think of the Income Statement in relation to your monthly personal finances. You have your monthly revenues: in most cases the salary from your job. You apply that monthly income to your monthly expenses: rent or mortgage, car loan, food, gas, utilities, clothes, phone, entertainment, etc. Our goal is to have our expenses be less than our income.

There is an old adage: "If you outflow is more than your income, your upkeep is your downfall."

Over time, and with experience, we become better managers of our personal finances and begin to realize that we shouldn't spend more than we make. Instead, we strive to have some money left over at the end of the month that we can set aside and save. In business, what is set aside and saved is called Retained Earnings.

We may invest some of what we set aside with an eye toward future benefits. We may invest in stocks, bonds, mutual funds, or education to expand our future earnings and career prospects. This is the same type of money management discipline that is applied in business. It's just a matter of scale. In business, we buy assets that help the enterprise expand or perform more efficiently. There are a few additional zeros after the numbers on a large company's Income Statement, but the idea is the same.

This concept applies to all businesses. Revenues are usually from Sales of products or services. Expenses are what you spend to support those sales in terms of the operations: Salaries, raw materials, manufacturing processes and equipment, offices and factories, consultants, lawyers, advertising, shipping, utilities etc. What is left over is the Net Income or Profit.

Again: Revenues – Expenses = Net Income.

Net Income is either saved to smooth out future operations and deal with unforeseen events (save for a rainy day); or invested in new facilities, equipment, and technology. Or part of the profits can be paid out to the company owners, called shareholders or stockholders, as a dividend.

The Income Statement is also known as the "profit and loss statement." Business people sometimes use the shorthand term "P&L," which stands for profit and loss statement. A manager is said to have "P&L responsibilities" if they run an autonomous division where they make marketing, sales, staffing, products, expenses, and strategy decisions.

P & L responsibility is one of the most critical responsibilities of any executive position. It involves monitoring the net income after expenses for a department or entire organization, with direct influence on how company resources are allocated and responsibility for performance.

Google the term "income statement," and you will see many examples of formats and presentations. Again, you will see there is variety depending on the industry and nature of the business, but they all follow these basic principles.

Remember: Income (revenue or sales) – Expenses = Net Income or profit

Learn Income Statements like a pro! With our guide, discover the basics of financial reporting and boost your financial knowledge!

1️⃣ What is an Income Statement?

An income statement, also known as a profit and loss statement (P&L), is a financial report that shows a company's revenues, expenses, and profits (or losses) over a specific period, typically a fiscal quarter or year.

2️⃣ Components of an Income Statement

Revenue (Sales): The total income from selling goods or providing services.

Cost of Goods Sold (COGS): The direct costs of producing the goods or services.

Gross Profit: Revenue minus COGS, representing the initial profit before operating expenses.

Operating Expenses: Costs related to the day-to-day operations of the business (e.g., salaries, rent, utilities).

Operating Income: Gross profit minus operating expenses, indicating the profit from core operations.

Non-Operating Income (Expenses): Additional income or expenses not directly related to core operations.

Net Income (Profit or Loss): The final result indicates the overall profit or loss after all income and expenses.

3️⃣ Analysis of an Income Statement

To evaluate a company's Income Statement, various margins and ratios are used:

Profit Margin

(Net Income / Revenue) x 100

Gross Margin

(Gross Profit / Revenue) x 100

Operating Margin

(Operating Income / Revenue) x 100

EBITDA Margin:

(EBITDA / Revenue) x 100

Revenue Growth Rate:

((Current Period Revenue – Previous Period Revenue) / Previous Period Revenue) x 100

Return on Equity (ROE):

(Net Income / Shareholders' Equity) x 100

Return on Assets (ROA):

(Net Income / Total Assets) x 100

4️⃣ Interpreting an Income Statement

Positive Net Income: The company is profitable, and the amount represents its earnings for the period.

Negative Net Income: The company incurred losses for the period.

Trends: Analyze trends over multiple periods to assess the company's financial health.

Comparisons: Compare the income statement with those of competitors or industry standards for benchmarking.

5️⃣ Importance of the Income Statement

• Investor Insight

• Management Tool

• Creditworthiness

• Strategic Planning

• Legal Compliance

• Transparency and Trust

• Benchmarking

Expenses

Salaries are usually a company's most significant Expense.

Opex vs. Capex.

Opex is short for Operating Expense, and Capex is short for Capital Expense. For example, salaries are an operating expense, and automation or robotics is a capital expense that offsets salaries by reducing the number of employees necessary to run a business.

Capital expenses appear as an asset on the balance sheet and are depreciated in the Income Statement.

COGS cost of goods sold.

Cost of goods sold (COGS) is the direct cost of making a company's products. It is an important line on your income statement that can tell you a lot about your financial performance, efficiency, and profitability.

SG&A

SG&A is an initialism used in accounting to refer to Selling, General, and Administrative Expenses, which is a significant non-production cost presented in an income statement.

Fixed costs

A fixed cost is an expense that a firm incurs that remains the same regardless of how many goods and services are produced or sold. Fixed costs are frequently associated with ongoing expenditures like rent, interest payments, and insurance that are not directly tied to production.

Variable costs

A variable cost is an expense for the firm that varies according to how much is produced or sold. Depending on a company's production or sales volume, variable costs grow or fall. They climb as output rises and reduce as production declines.

A manufacturing company's raw material and packaging costs, credit card transaction fees, or shipping charges, which increase or decrease with sales, are examples of variable costs.

Fixed costs and variable costs can be compared and analyzed.

Break even with revenue.

When determining when you will break even financially, a break-even analysis compares the expenses of a new business, service, or product against the unit sale price. In other words, it indicates when you will have generated enough revenue to pay for all your expenses, both fixed and variable.

Non-cash expenses: AP, depreciation, and amortization

The second most significant Expense in business is usually Taxes.

14 Types of Costs You Should Know

????? ?? ????????? ?? ???????? ??????

- Relevant/Incremental Costs: Future costs that are relevant to decision-making

- Irrelevant/Sunk Costs: Past costs that are irrelevant to decision-making

????? ?? ????????

- Product Costs: Inventoried costs associated with the production of products or services

- Period Costs: Costs not related to production and expensed in the period

- Manufacturing Costs: total costs associated with the production of goods, including direct materials, direct labor, and manufacturing overhead

- Operating Costs: total costs associated with day-to-day operations

- Conversion Costs: costs incurred when converting raw materials into finished products

- Overhead Costs: indirect costs not tied to a specific product or service, often including items like rent, utilities, and administration costs (can be manufacturing or non-manufacturing)

????? ?? ????????????

- Direct Costs: Costs that can be traced directly to a specific cost object

- Indirect Costs: Costs that cannot be traced directly to a specific cost object

????? ?? ????????

- Fixed Costs: Costs that remain constant regardless of the level of production or services

- Variable Costs: Costs that vary in direct proportion to the level of production

- Semi-variable Costs/Mixed Costs: Costs that contain both fixed and variable components

- Step Costs: Costs that remain fixed only for a certain volume or range of activity

Economic Costs: the total cost of producing your goods or services, including explicit costs (such as wages and materials) and implicit costs (such as opportunity costs).

Allocated Costs: indirect costs that you cannot directly trace to a specific product or service and which you instead distribute to products based on a pre-determined method ideally driven by a cause-effect relationship

Net income. Profit. Earnings

Net income, Earnings, and Profits are synonyms.

In business, as in life, it’s not what you make (revenue). It’s how much you keep (profit). Two ways to achieve more net income: increase revenue or decrease expenses.

EBIT earnings before interest and taxes

EBITDA. Cash flow. Remove distortions of non-cash expenses.

Income Statement - Revenue to Net Profit Movement

What causes the change from the revenue to EBITDA to Net Profit?

Observing the movement on the chart below will help you understand the cause of change.

Below are the explanations and calculations for each step depicted on the chart:

Revenue
• Revenue, also known as sales or turnover, is the total amount of money a company generates from its primary business activities.

COGS
• COGS refers to the direct costs associated with producing or manufacturing the goods or services that a company sells.

Gross Profit
• Gross Profit is the amount of money a company has left after subtracting the direct costs of producing its goods or services (COGS) from its total revenue.
• GP = Revenue – GOGS

OPEX
• OPEX are a company’s ongoing costs to operate its business. Include items such as rent, utilities, salaries, and marketing expenses.

Other Income
• Other Income refers to revenue generated by a company that is not directly related to its core business operations. This can include income from investments, interest, or other sources outside the company's primary activities.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
• EBITDA is a measure of a company's operating performance. It excludes interest, taxes, and non-cash expenses like depreciation and amortization.
• EBITDA = GP – OPEX + Other Income

EBIT (Earnings Before Interest & Taxes)
• Depreciation and amortization are non-cash expenses that represent the allocation of the cost of tangible and intangible assets over time.
• EBIT = EBITDA – Depreciation

EBT (Earnings Before Taxes)
• Interest expenses represent the cost of borrowed funds. Subtract interest from the Adjusted EBITDA.
• EBT = EBIT – Interest Expense

Net Profit
• Subtract taxes from Earnings Before Taxes to arrive at Net Profit.
• Net Profit = Earnings Before Taxes - Taxes

Income Statements don't have a universal look or layout.

That's because management teams have complete control over the terms & layout of their financial statements.

Here are the other words that management teams can use when creating their Income Statement:

INCOME STATEMENT SYNONYMS:

→Revenue Statement

→Earnings Statement

→Operating Statement

→Statement of Earnings

→Statement of Operations

→Profit and Loss Statement (P&L)

REVENUE SYNONYMS:

→Sales

→Income

→Top Line

→Receipts

→Turnover

→Gross Sales

→Gross Income

COST OF GOODS SOLD SYNONYMS:

→Goods Cost

→Direct Costs

→Cost of Sales

→Cost of Revenue

→Cost of Products Sold

GROSS PROFIT SYNONYMS:

→Sales Profit

→Gross Margin

→Gross Income

→Gross Earnings

OPERATING EXPENSES SYNONYMS:

→Overhead

→Operating Costs

→Operating Outgo

→Sales & Marketing

→Business Expenses

→Operational Expenses

→General & Administrative

→Research & Development

→Selling, General, and Administrative Expenses (SG&A)

OPERATING INCOME SYNONYMS:

→Operating Profit

→Business Income

→Operating Margin

→Operating Earnings

→Operating Cash Flow

→Earnings Before Interest and Taxes (EBIT)

PRE-TAX PROFIT SYNONYMS:

→ Pretax Profit

→ Pretax Earnings

→Income Before Tax

→Profit Before Tax (PBT)

→Earnings Before Tax (EBT)

→Operating Profit Before Tax

→Earnings Before Income Taxes (EBIT)

INCOME TAX SYNONYMS:

→Direct Tax

→Revenue Tax

→Earnings Tax

→Tax on Income

→Corporate Income Tax

→Fiscal Charge on Income

EARNINGS SYNONYMS:

→Profits

→Income

→Earnings

→Net Profit

→Bottom Line

→Net Earnings

→Profit After Tax (PAT)

→Net Income After Taxes

→Earnings After Tax (EAT)

→Net Income Before Extraordinary Items

SHARES OUTSTANDING SYNONYMS:

→Issued Shares

→Outstanding Stock

→Outstanding Equity

→Basic Shares Outsanding

→Diluted Shares Outstanding

→Outstanding Shares of Stock

→Fully Diluted Shares Outstanding

EARNINGS PER SHARE SYNONYMS:

→EPS

→Profit Per Share

→Net Income Per Share

3 Easy Steps to Analyze Business Profitability.

Most business problems fall into one of 3 main areas:

Profitability: How effectively your business generates profit in relation to its expenses.

Cash Flow: The management of the inflow and outflow of cash, ensuring that your business can meet its financial obligations.

Growth: The ability of your business to expand sustainably and profitably.

Financial analysis is a key tool in identifying and addressing these three critical business issues.

Here's how to solve profitability issues:

1️⃣ Gross Profit Margin: (Gross Profit / Revenue) x 100

>> This tells you how efficiently you use raw materials and labor.

>> Drops could be due to increased costs or ineffective pricing.

>> If this margin is dropping, look to renegotiate contracts, trim waste in production, or tweak prices

2️⃣ Operating Profit Margin: (Operating Income / Revenue) x 100

>> This shows how much of each dollar of revenues is left after considering COGS and OPEX (operating expenses).

>> If this margin is dropping, your indirect costs may need to be reviewed because you lack operating flexibility.

3️⃣ Net Profit Margin: (Net Income / Revenue) x 100.

>> Net Profit is what's left of revenues after all expenses and taxes are paid.

>> If this margin is dropping but your other margins are fine, consider tax and debt cost optimization.

>> If this margin drops alongside your other margins, your business model and capital structure may need an overhaul.

The P&L Statement, Visualized

If you're in business, you MUST understand how a Profit & Loss Statement works.

P&L has many different names, including:

• Income Statement

• Revenue Statement

• Earnings Statement

• Operating Statement

• Statement of Earnings

• Statement of Operations

The P&L shows a company's profitability at multiple levels over a period of time using accrual accounting.

Its purpose is to track a company's revenue, expenses, and profits.

Main sections:

? REVENUE: Total Sales

➖ COST OF GOODS SOLD: The cost to deliver the product or service

? GROSS PROFIT: Revenue - Cost of Goods Sold

➖ R&D EXPENSES: All expenses related to developing products & services

➖ SG&A EXPENSES: All other overhead expenses

? OPERATING INCOME: Gross Profit - Operating Expenses

➖ INTEREST EXPENSE: Interest paid to bondholders & banks

? PRE-TAX INCOME: Operating Income - Interest Expense

➖ INCOME TAX: Taxes paid to Governments

? NET INCOME: Pre-Tax Income - Income Tax

To analyze a P&L quickly, focus on changes in margins.

GROSS MARGIN

Gross margin is a profitability metric that indicates the percentage of revenue after subtracting the cost of goods sold (COGS).

Calculation

Gross Margin = Gross Profit / Revenue

Gross Profit = Revenue - COGS

OPERATING MARGIN

Operating margin, or operating profit margin, measures the percentage of operating income (profit after operating expenses) relative to total revenue.

Calculation

Operating Margin = Operating Income / Revenue

NET MARGIN

Net margin, also referred to as net profit margin or simply profit margin, represents the percentage of net income (profit after all expenses, including interest and taxes) relative to total revenue.

Calculation

Net Margin = Net Income / Revenue

How do we analyze companies?

Start with the income statement.

It can show us the revenues, expenses, and profits over a specific period.

The income statement can give us insights into whether the company is growing or shrinking.

Here is the breakdown of an income statement in its most common form:

???????: This includes all income from sales, services, or other primary business activities.

???? ?? ????? ???? (????): Direct costs attributable to the production of goods sold by a company.

????? ??????: Calculated as Revenue minus Cost of Goods Sold. It represents a company's profit after deducting the costs associated with making and selling its products.

????????? ????????:

???????, ???????, ??? ?????????????? ???????? (??&?): Expenses related to selling products and managing the business.

???????? ??? ??????????? (?&?): Costs of developing new products or services.

????????? ?????? is Earnings Before Interest and Taxes (EBIT), which is calculated by subtracting operating expenses from gross profit.

???????? ???????: The cost incurred by an entity for borrowed funds.

????? ??????/????????: Non-operational revenue or costs, such as gains or losses from investments or foreign exchange.

???-??? ??????: Income before income taxes are deducted.

Income Tax Expense: The amount of tax owed based on pre-tax income.

??? ??????: The final bottom line of the income statement, calculated as Pre-tax Income minus Income Taxes. This figure represents the total earnings attributable to shareholders after deducting all expenses.

Also crucial to analyzing an income statement is margins:

• Gross margin = Gross profit/revenues

• Operating margin = Operating profit/revenues

• Net Income margin = Net Income profit/revenues

Ideally, we want stable or growing margins.

The bottom line is that we want a growing, profitable company that can lead to further digging.

4 Types of Income Statement Analysis

1. Vertical Analysis:

Vertical analysis dissects the income statement vertically, showcasing each line item as a percentage of total revenue.

This method offers a snapshot of the proportion of expenses, making it easier to identify trends and assess cost structures.

2. Horizontal Analysis:

By comparing income statements across multiple periods, horizontal analysis unveils the evolution of financial performance over time.

Understanding year-over-year changes aids in identifying growth patterns, potential areas of concern, and overall business stability.

3. Ratio Analysis:

Ratios derived from income statement figures provide a deeper understanding of a company's financial health.

Key ratios like the profit margin, return on assets, and earnings per share offer valuable insights into profitability, efficiency, and overall operational effectiveness.

4. Common Size Analysis:

This analysis involves expressing each line item as a percentage of total revenue.

It provides a standardized view of the income statement, facilitating comparisons across different companies or industries.

Common size analysis helps investors and analysts evaluate the relative importance of each expense category.

Embracing these diverse analytical approaches empowers financial professionals to make informed decisions, assess risk, and strategize for sustained business success.

Balance Sheet Basics

The Balance Sheet is a condensed statement that shows the financial position of an entity on a specified date, usually the last day of an accounting period.

Among other items of information, a balance sheet states

• What Assets does the entity own,

• How it paid for them,

• What it owes (its Liabilities), and

• What is the amount left after satisfying the liabilities (its Equity)

Balance sheet data is based on what is known as the

Accounting Equation: Assets = Liabilities + Owners' Equity.

Think of a Balance Sheet in terms related to everyday life. For example, homeownership, when you have a mortgage, is represented as a Balance sheet. Your home ownership has the three components of Asset, Liability, and Equity.

The Asset is the value of the house. An appraisal determines this. An appraisal considers recent sales of homes in the area and compensates for differences like the number of bath or bedrooms, the size of the lot, etc.

The Liability is the mortgage. This debt is how much you owe against the house.

Equity is the difference between the asset's value and the Liability amount. For example, if your home is worth $200,000 and you have a remaining mortgage balance of $150,000, then you have $50,000 in Equity. We sometimes call this homeowner's Equity.

If your mortgage balance is more than the value of the home, then you are considered "upside down" or "underwater." The same principle applies to a business: if the value of its Liabilities is more than the value of the Assets, then the enterprise is insolvent and probably headed for bankruptcy.

A Balance Sheet is organized under subheadings such as current assets, fixed assets, current liabilities, Long-term Liabilities, and Equity.

The Balance Sheet, along with the income and cash flow statements, comprises the financial statements, a set of documents indispensable for running a business.

What does the Balance Sheet balance?

The balance sheet is structured to show the amount and type of assets an enterprise owns and how those assets are funded. One side of the balance sheet shows what you have (assets), and the other side shows how you paid for it (Debt and Equity).

Assets can be purchased and paid for in two ways: with debt or with Equity (or a combination of the two). What a company owes, the obligations or loans, are called Liabilities; what a company owns is the Equity or Stock.

The Liabilities and Equity are equal to the Assets. Therefore, they are two sides of the same coin and must balance, hence the term Balance Sheet.

This balancing is a fundamental principle of Accounting called the Accounting Equation. Assets = Liabilities + Equity.

Balance Sheet Format

A Balance Sheet is typically organized in two columns, with the Assets on the left and the Liabilities and Equity on the right. It is divided into subcategories, with the most current types on top and the more long-term varieties towards the bottom.

Current Assets are ones like cash that can be used on short notice, and Long term Assets are things like factories that would take longer to convert to cash—current means short-term, stuff that needs to be addressed within one year. Long-term means stuff longer than the next year.

Bills that need to be paid within the month are considered Current Liabilities, and loans that are paid back over years are regarded as Long term Liabilities.

Equity is what the owners actually own. Equity is basically Assets less Liabilities and is shown as accounts below the Liabilities on the left-hand side. Equity is shown below the Liabilities because debt has senior claims on the assets.

In the event of liquidation like bankruptcy, the debt holders get paid from the sale of assets first, and then anything left over goes to the equity holders.

Here is an example Balance Sheet to get and idea of the format; notice that the Total Assets equals the Total Liabilities plus Equity.

The Balance Sheet Explained Simply

The master equation: Assets = Liabilities + Shareholder Equity

TIME: The Balance Sheet records a Point in Time

ACCOUNTING METHOD: Accrual

3 Main Sections:

ASSETS: What the company Owns

LIABILITIES: What the company Owes to creditors

EQUITY: The net value of the owner's claim

ASSETS

They are listed in order of liquidity (how quickly it can be turned into cash).

CURRENT ASSETS: Expected to be used in <1 year

→Cash

→Marketable Securities

→Accounts Receivable

→Inventory

→Other Current Assets

LONG-TERM ASSETS: Expected to be last >1 year

→Long-Term Investments

→Fixed Assets

→Goodwill

→Other Long-Term Assets

LIABILITIES

Listed in order of when they are expected to be paid off.

CURRENT LIABILITIES: Expected to be paid in <1 year

→Payables & Accrued Expenses

→Short-Term Debt

→Other Current Liabilities

LONG-TERM LIABILITIES: Expected to be paid in >1 year

→Long-Term Debt

→Other Long-Term Liabilities

SHAREHOLDER'S EQUITY

CAPITAL RAISED FROM INVESTORS

→Preferred Stock

→Common Stock & Additional Paid-In Capital

PROFITS RETAINED BY THE COMPANY

→Retained Earnings

→Treasury Stock

I'll teach you How to Read a Balance Sheet in 7 minutes.

I've spent 30+ years studying Finance, with 15 as a public company CFO.

This post is a "cheat sheet" ebook on how to read a Balance Sheet in 7 minutes:

• What does the balance sheet tell you?

• What is the structure of the balance sheet?

• What are Assets?

• What are Liabilities?

• What is Equity?

• How do you analyze a balance sheet?

Here is a quick analysis of the balance sheet:

??????? ??????

Calculate the working capital (current assets - current liabilities) to assess the company's liquidity.

????

calculate cash to short-term liabilities to review any potential liquidity issues in the very short term.

??????? ???????????

Calculate dso to see how quickly the company collects cash.

???????????

Calculate dio to see how the company is efficient in converting inventories into cash

????? ??????

Check the efficiency with fixed asset turnover evaluation.

Evaluate fair value, especially for intangibles.

??????? ???????????

Calculate the current ratio and quick ratio to assess liquidity.

??????? ????????

Calculate Days Payable Outstanding (DPO) to track how quickly a company pays a bill and tends to prolong terms.

????? ???? ????

The top priority in payment. Make sure the company is able to meet its immediate financial obligations.

???-??????? ????

Evaluate debt-to-asset ratio to determine solvency.

??????

Calculate the equity ratio (equity / total assets) to understand stability

ROE (net income/equity) to understand the profitability

???? ???? ??? ?? ???? ?? ????? ????????

1. understand the meaning of the ratio

2. result interpretation

3. compare with last period, budget and industry peers

4. action plan

Here's how you can be a financial expert by analyzing balance sheets:

?????????? ??? ??????:

==============

Grasp the fundamental concepts of assets, liabilities, and equity. Familiarize yourself with the balance sheet equation: Assets = Liabilities + Equity.

??????? ??????? ??? ???-??????? ??????:

==========================

Assess the company's ability to convert its assets into cash within a year. Evaluate the value of long-term assets like property, plant, and equipment.

?????????? ???????????:

============

Evaluate the company's short-term and long-term obligations. Understand how these obligations impact the company's financial flexibility.

??????? ?????? ???????????:

==================

Analyze the company's common stock and retained earnings. Assess the ownership structure and the company's ability to generate profits over time.

?????? ??? ??????:

============

Utilize ratios like the current ratio, debt-to-equity ratio, and debt-to-asset ratio to gain insights into the company's financial strength and efficiency.

???????? ????????? ???? ?????:

=================

Be vigilant about red flags like increasing accounts receivable, rising inventory, and high debt levels. These signals could indicate potential financial risks.

????????? ??? ???????:

================

Benchmark the company's balance sheet ratios against industry peers to assess its relative financial position.

??????? ?????????? ????????:

====================

Financial analysis is not an exact science. To enhance your expertise, stay informed about financial trends, accounting standards, and industry developments.

DEPRECIATION

DEPRECIATION is an accounting method used to allocate the cost of tangible assets (such as buildings, machinery, and vehicles) over their useful lives. It represents the systematic reduction in an asset's value due to wear and tear, obsolescence, or other factors.

Depreciation happens to TANGIBLE Assets (you CAN touch them)

Examples:

• Car

• Equipment

• Buildings

3 DEPRECIATION METHODS

STRAIGHT - LINE

The most common and easiest method to calculate depreciation. To use this depreciation method, you need to divide the cost of an asset by the useful life of an asset (in years).

FORMULA: Cost / Useful Life

DECLINING BALANCE

Used to calculate large depreciation expenses or assets that quickly lose value. Multiply the opening book value by the depreciation rate.

FORMULA: Opening book value x (100% / Useful Life of asset)

SUM OF THE YEARS DIGITS

An accelerated depreciation method increases the expense in the early years and lowers it in the latter years. Multiply the cost of an asset by its useful life over the sum of the years digits.

FORMULA: Cost x ( Useful life / Sum of the Years digits)

See the infographic for examples!

The cash flow statement is a financial document that provides detailed data regarding all cash inflows a company receives from its ongoing operations and external investment sources and all cash outflows that pay for business activities and investments during a given period. It is one of the three fundamental financial statements used to assess a company's performance and financial health; the other two are the income statement and the balance sheet.

Here are the key components of a cash flow statement:

1. Operating Activities: This section shows the cash flow from day-to-day business operations. It starts with net income and then reconciles all non-cash items to cash items involving operational activities. This includes adjustments for depreciation, changes in accounts receivable and payable, and changes in inventory.

2. Investing Activities: This section reports cash flow from all investing activities. It includes purchases of physical assets, investments in securities, or the sale of securities or assets. Negative cash flow here could indicate that the company is investing in its future growth.

3. Financing Activities: This section reflects the cash flow from financing activities like issuing stock, paying dividends, and borrowing. It explains how a company finances its operations and growth through debt, equity, and dividend policies.

4. Net Increase or Decrease in Cash: This section shows the net change in the company's cash position over the period. If the closing balance of cash and cash equivalents is higher than the opening balance, the company has a net increase in cash.

5. Beginning and Ending Cash Balance: The statement starts with the amount of cash on hand at the beginning of the period and ends with the amount of cash at the end of the period.

The cash flow statement is essential for understanding a company's liquidity, solvency, and overall financial health. It shows how well a company manages its cash position, indicating whether it can generate enough cash to meet its debt obligations and fund its operating expenses. Unlike the income statement, it's immune to accounting assumptions and is a good indicator of a company's financial strength and ability to generate cash to fund operations.

EBITDA Explained

What is EBITDA, and what is your take on this metric?

EBITDA stands for:

• Earnings

• Before:

• Interest

• Taxes

• Depreciation

• Amortization

It's a financial metric that shows how much money a company makes before accounting for non-operational expenses like interest and taxes and non-cash expenses like Depreciation and Amortization.

Why is EBITDA important for Businesses?

EBITDA is important because it gives businesses an idea of how much money they generate from their operations.

This is useful for investors and lenders who want to know how profitable a company is.

It's like a scorecard to know how much money a company is making.

How is EBITDA calculated?

To calculate EBITDA, start with a company's revenue and subtract its cost of goods sold.

Then, you subtract its operating expenses (like salaries and rent).

Another way to calculate it:

Net Income

+ Interest Expense

+ Taxes

+ Depreciation

+ Amortization

EBITDA vs. Net Income

EBITDA:

In EBITDA, you don't consider these expenses: Depreciation, Taxes, and Interest.

Net Income:

However, net income is what remains as actual profit after Depreciation, interest, and taxes are taken into account.

Cash Flow Statements do not have a universal look or layout.

That's because management teams control the terms and categories of their financial statements.

Here are the other words that management teams can use when creating their Cash Flow Statement:

CASH FLOW STATEMENT SYNONYMS:

→Cash Statement

→Statement of Cash Flow

→Financial Flow Statement

→Statement of Financial Flows

→Statement of Cash Operations

NET INCOME SYNONYMS:

→Profits

→Income

→Earnings

→Profit After Tax

→Earnings After Tax

NON-CASH CHARGES

→Depreciation

→Amortization

→Write-downs

→Deferred Taxes

→Impairment Charges

→Stock-based Compensation

→Unrealized Gains and Losses

CHANGES IN WORKING CAPITAL

→Credits

→Accruals

→Payables

→Provisions

→Inventories

→Receivables

→Prepayments

OPERATING CASH FLOW

→Cash Profit

→Cash Income

→Operating Cash

→Cash from Operations

→Cash Generated from Operations

→Net Cash from Operating Activities

CAPITAL EXPENDITURES:

→Capex

→PPE Spend

→Plant Outlay

→Property Spend

→Facilities Spend

→Equipment Spend

→Infrastructure Spend

→Property, Plant, and Equipment

ACQUISITIONS:

→Merger

→Takeover

→Asset Buy

→Consolidation

→Company Purchase

→Corporate Acquisition

PROCEEDS FROM SALE OF INVESTMENTS

→Sale Gain

→Disposal

→Asset Sale

→Divestiture

→Liquidation

→Sale Proceeds

→Disposal of Investments

→Proceeds from Sales of Assets

→Proceeds from Disposition of Investments

NET CASH FROM INVESTING ACTIVITIES

→Investing Cash

→Investment Flow

→Investment Outlay

→Cash from Investing

→Investing Cash Flows

→Cash Used in Investing

→Cash Flow from Investments

→Net Cash Used in Investing Activities

BORROW / REPAY DEBT:

→Debt Raised

→Loan Issuance

→Bond Issuance

→Debt Refinance

→Issuance of Bonds

→Borrowing Activities

→Repayment of Loans

→Debt Financing Activities

→Payments on Borrowings

→Debt Issuance/Repayment

→Proceeds from Issuance of Debt

ISSUE / REPURCHASE STOCK:

→Stock Sale

→Equity Issue

→Issuing Shares

→Equity Buyback

→Share Buyback

→Stock Issuance

→Equity Offering

→Stock Redemption

→Equity Repurchase

→Repayment of Share Capital

→Issuance of Equity Interests

→Repurchase of Equity Interests

PAY DIVIDENDS:

→Payouts

→Dividend Outlay

→Profit Distribution

→Dividend Allocation

→Distribute Earnings

→Dividend Remittance

→Dividend Distribution

→Dividend Disbursement

→Shareholder Dividends

→Cash Dividend Payment

NET CASH FROM FINANCING ACTIVITIES:

→Finance Cash

→Funding Cash

→Financing Flow

→Fund Injections

→Funding Activities

→Cash from Financing

→Cash from Financial Activities

→Net Cash Provided by Financing Activities

I've spent 35 years studying Finance, with 15 as a CFO, and

I'll teach you everything you need to know about the Statement of Cash Flows (SCF) in the next 7 minutes:

• What does the SCF tell you?

• What are the different types of cash flows?

• What are operating activities?

• What are investing activities?

• What are financing activities?

• How do you analyze the SCF?

How to Analyze a Cash Flow Statement

Earnings are an opinion; cash flow is a fact.

The Cash Flow Statement is by far the most important Financial Statement.

I'll teach you everything here.

1️⃣What is a Cash Flow Statement?

- A cash flow statement shows you how much cash goes in and out of a company over a certain period

- The purpose of this statement is to track how much cash is moving through a business

- You want to invest in companies that generate cash and manage their cash position well

2️⃣Structure of a Cash Flow Statement

Every cash flow statement consists of 3 parts:

• Cash Flow from Operating Activities

• Cash Flow from Investing Activities

• Cash Flow from Financing Activities

3️⃣Cash Flow from Operations

- This section shows all cash the company generated from its normal business activities

- It shows you all the cash a company earned from selling its normal products and services

- The cash flow from operating activities is comparable to net income, but it filters out a few income and expense posts that didn't cause actual cash to enter or exit the company

- Cash Flow from operating activities = net income + non-cash charges +/- changes in working capital

4️⃣Cash Flow from Investing Activities

The Cash Flow from Investing Activities gives you an overview of the company's investment-related income and expenditures.

- The Cash Flow from Investing Activities consists of 3 major parts:

o Capital expenditures (CAPEX)

o Mergers & Acquisitions

o Marketable securities

- Cash flow from investing activities = Sale of marketable securities + divestments - CAPEX - Mergers & Acquisitions - purchase of marketable securities

5️⃣Cash Flow from Financing Activities

- Measures the cash movements between a company and its owners (shareholders) and its debtors (bondholders)

- This section gives you an insight into how the company is financing its business activities

- Cash Flow from Financing Activities = Debt issuance + issuance of new stocks - dividends - debt repayments - share buybacks

6️⃣Changes in cash balance

- Finally, you can calculate the total changes in the cash balance

- Cash at the end of the year = Cash at the beginning of the year + CF from operating activities + CF from investing activities + CF from financing activities

Cash is King!

And the CFO is the king-maker.

Here are 19 ways you can improve your cash flow:

1. VOLUME - More volume from existing customers

2. VOLUME - Bring in new customers

3. VOLUME - Get referrals from existing customers

4. VOLUME - Run marketing campaigns for new leads

5. VOLUME - Launch new products and categories

6. PRICE - Launch higher-priced new items

7. PRICE - Raise prices on existing items

8. COGS - Get better deals with your suppliers

9. COGS - Automate processes and production

10. COGS - Manager better and learn from returns

11. SG&A - Cut the marketing budget

12. SG&A - Optimize the payroll

13. SG&A - Cut other spending like travel and consultants

14. SG&A - Find new ways to run your logistics

15. PP&E - Increase return on assets

16. PP&E - Develop proprietary technology

17. INVENTORY - Increase inventory turns

18. INVENTORY - Better inventory management

19. INVENTORY - Increase your buying efficiency

This is a partial list.

There are so many ways you can optimize cash flow.

You must identify through an analysis where the most considerable potential is.

Then, bring the right people around the table to discuss actions to take.

Decide what to do and follow up if you get the desired results.

If yes, push for more.

If not, find out why and execute better or do something different.

That's the WHAT and HOW of increasing cash flow.

The Cash Conversion Cycle - Visualized

What is it? Why is it important?

The Cash Conversion Cycle (CCC) is not just a theoretical concept but a practical tool that measures how efficiently a company manages its working capital. Understanding CCC can help you identify areas for improvement in your business operations.

It is the time period between when a company purchases inventory from its suppliers and when it collects the cash from customers.

A shorter CCC is a sign of efficient business operations. This means the company can quickly convert its investments into cash, available for other business needs. This improves the company's liquidity and allows it to respond more effectively to market changes and opportunities.

The CCC is measured in days.

The formula for CCC is straightforward: it's the sum of the Days Inventory Outstanding (DIO), the Days Sales Outstanding (DSO), minus the Days Payable Outstanding (DPO).

DIO = Days Inventory Outstanding = (Average Inventory/COGS) × 365

DSO = Days Sales Outstanding = (Average AR/ Credit Sales) x 365

DPO = Days Payable Outstanding = (Average AP/ COGS) x 365

AR = Accounts Receivable

AP = Accounts Payable

COGS = Cost of Goods Sold

A bad CCC is 90+ days.

An average CCC is between 30 and 90 days.

A good CCC is <30 days.

A GREAT CCC is <0, which means the company collects cash from customers before it pays its suppliers.

Cash Flow Ratios

The Cash Flow Statement shows a company's profitability at multiple levels over a period of time using cash accounting.

3 Main sections:

OPERATING ACTIVITIES

Shows cash inflows & outflows from normal operations

INVESTING ACTIVITIES

Shows cash outflows from capital expansion & long-term investments

FINANCING ACTIVITIES

Shows cash changes to the company's capital structure

6 Cash Flow Ratios to watch

LIQUIDITY RATIOS

Cash Ratio = Cash Balance ➗ Current Liabilities

Current Ratio = Current Assets ➗ Current Liabilities

COVERAGE RATIOS

Cash Coverage Ratio = Cash Balance ➗ Interest Expense

Debt To OCF = Total Debt➗ Operating Cash Flow

VALUATION RATIOS

Price to CFFO = Share Price ➗ Cash Flow From Operations Per Share

Price to FCF = Share Price ➗ Free Cash Flow Per Share

If you invest, you MUST understand ratio analysis.

Here are the top 6 ratios every investor should know:

Gross Margin

▶ Formula: Gross Profit / Sales

▶ Shows How Good the Company is at Turning Sales into Gross Profit

Price to Earnings

▶ Formula: Share Price / Earnings Per Share

▶ Shows the Company's Current Valuation

Debt to Equity

▶ Formula: Total Liabilities / Shareholder Equity

▶ Shows How the Company has Financed Itself

Return on Equity

▶ Formula: Net Income / Shareholder Equity

▶ Shows How Good the Company is at Generating Profits For Shareholders

Net Profit Margin

▶ Formula: Net Income / Sales

▶ Shows How Good the Company is at Turning Sales into Profits

Return on Invested Capital

▶ Formula: NOPAT / Invested Capital

▶ Shows the Capital Efficiency of the Business

Financial statements – primarily the Balance Sheet, Income Statement, and Cash Flow Statement – are intricately linked and provide a comprehensive picture of a company's financial health. Understanding how they interconnect is crucial for analyzing a company's performance and financial position.

The Balance Sheet: This statement provides a snapshot of a company's financial position at a specific point in time. It lists the company's assets (what it owns), liabilities (what it owes), and equity (the owner's share). The fundamental equation of the balance sheet is Assets = Liabilities + Equity.

The Income Statement: Also known as the Profit and Loss Statement, it shows the company's revenues and expenses over a period (e.g., a quarter or a year). It starts with sales revenue and subtracts various costs to arrive at the net income or loss. The bottom line of the income statement, 'Net Income,' links directly to both the balance sheet and the cash flow statement.

• • Link to the Balance Sheet: The net income contributes to a company’s equity as Retained Earnings. Retained Earnings are a part of the shareholder's equity on the balance sheet and represent the accumulated amount of net income that has been retained (not paid out as dividends) within the company.

  • Link to the Cash Flow Statement: The net income is the starting point for the cash flow statement's 'Operating Activities' section.

The Cash Flow Statement: This statement shows the actual inflows and outflows of cash and cash equivalents over a period. It helps stakeholders understand how the company generates and uses its cash. It is divided into three sections: Operating Activities, Investing Activities, and Financing Activities.

• • Operating Activities: This section starts with the net income from the income statement and adjusts for non-cash items and changes in working capital.

  • Investing Activities: These include cash flows from the purchase and sale of assets, like property and equipment, which are reflected in the balance sheet's asset section.

  • Financing Activities: These are cash flows related to borrowing and repaying debt, issuing equity, and paying dividends, which affect the liabilities and equity sections of the balance sheet.

  • Net Increase/Decrease in Cash: This figure is added to/subtracted from the previous period's cash balance on the balance sheet.

Feedback Loop and Continual Flow: After adjusting for cash flows, the ending cash balance from the cash flow statement is carried over to the balance sheet as the cash amount for the new period. Simultaneously, the net income affects both the equity section of the balance sheet and the beginning of the cash flow statement. This cycle repeats each reporting period, demonstrating the interconnected nature of these statements.

In summary, the income statement provides a view of profitability over a period, the balance sheet shows financial position at a point in time, and the cash flow statement reconciles the two by showing how money is generated and spent. Together, these statements provide a holistic view of a company's financial health and are invaluable for investors, managers, and other stakeholders.

How Financial Statements Interconnect and Link

Understanding how the three financial statements connect is critical to gaining financial fluency.

INCOME STATEMENT

Shows a company's revenue, expenses, and net income over a period of time (month, quarter, year) using accrual accounting.

BALANCE SHEET

Shows a snapshot of a company's assets, liabilities, and equity at a point in time using accrual accounting.

CASH FLOW STATEMENT

Shows a company's cash movements over a period of time (month, quarter, year) using cash accounting.

Many connections between financial statements bridge the gap between cash accounting & accrual accounting.

Note: This visual doesn't show all the connections, just the major ones.

Understanding the Interconnectivity of Financial Statements

Financial statements are interwoven documents that tell the entire fiscal story of a business. The interplay among the Balance Sheet, Income Statement, and Cash Flow Statement is essential for a comprehensive understanding of a company's financial standing.

The Balance Sheet, a snapshot of the company's financial status at a specific point in time, reflects information derived from the Income Statement.

In turn, the Income Statement, which details the company's revenues and expenses over a period, draws upon data concerning the company's assets, liabilities, and equity as depicted in the Balance Sheet.

Meanwhile, the Cash Flow Statement serves as the connecting thread, demonstrating how the business's operations generate and use cash, thus linking the operational results with the company's financial position.

To construct a dynamic financial model, one begins by channeling Net Income from the Income Statement to the Balance Sheet, contributing to Retained Earnings, and then to the Cash Flow Statement as a part of Operating Cash Flow.

The adjustments made in Current Assets and Current Liabilities on the Balance Sheet are totaled to reflect the Changes in Operating Assets and Liabilities within the Cash Flow Statement.

Adding back the Depreciation Expense, a non-cash charge, into the Cash Flow Statement under Operating Cash Flow is a crucial step. This amount is then reconciled in the Investing Cash Flow section by adjusting the beginning Fixed Assets balance and any acquisitions or disposals to arrive at the net cash used or provided by investing activities.

The reconciliation of Long-Term Debt involves subtracting the opening balance from the ending balance, which determines the cash flows related to financing activities. Similarly, Equity adjustments are made by adding the period's Net Income to the opening balance and subtracting the ending balance to finalize the Financing Cash Flows.

The sum of the previous period's ending cash balance and the current period's flows from operations, investing, and financing activities cumulatively determine the new closing cash balance on the Balance Sheet.

It's crucial to remember that crafting a Cash Flow Statement requires just two Balance Sheets—one from the start and one from the end of the period—and an Income Statement that covers the interim. This setup is instrumental in tracking the cash's journey through the business, providing key insights into the company's vitality and risk exposure.

However, avoiding jumping to conclusions based on cash flow figures is essential. Positive cash flows may not always signal financial health, just as negative cash flows don't inherently spell trouble. The context in which these cash flows occur is vital for accurate interpretation and analysis.

Revenue and Income are NOT the same things!

Costs and Expenses are NOT the same things!

Net Income and Free Cash Flow are NOT the same things.

Confused? Let me break it down for you:

Sales and revenue mean the same things.

Both are the money that comes in from customer payments.

They both refer to the "top line" of the income statement.

Orders and sales are NOT the same things.

Orders are when a customer places a request for the future delivery of a product or service.

Orders become sales when the product is actually shipped or the service is performed.

Costs are different from expenses.

Costs are money spent on making a product or delivering a service (hence "cost of goods sold")

Expenses are money spent on developing, selling, accounting for, and managing the product or service.

Costs and expenses both become expenditures when money is actually sent to the vendors to pay the bills.

Profits, earnings, and net income all mean the same thing.

They are the "bottom line" of the income statement.

They all represent what is left over after all of the costs & expenses are subtracted from the revenue.

Net income and free cash flow are NOT the same things!

Net income measures profitability on the income statement using accrual accounting.

Free cash flow measures cash flow available to shareholders on the cash flow statement using cash accounting.

Accrual accounting and cash accounting are not the same things.

Accrual accounting: revenue or expenses are recorded when they occur, not when payment is received or made

Cash accounting: transactions are recorded only when money goes in or out of an account.

Four Fundamental Steps to Gauge a Business's Fiscal Well-Being

Whether you're delving into the financial world as an expert or navigating it from another professional angle, grasping the financial vitality of a business is crucial.

Here's how these insights apply across different roles:

These steps are vital for accountants or financial experts in pinpointing and steering the essential factors influencing financial outcomes.

For those in management, such understanding sharpens awareness of how capital is distributed within the company, allowing for synergy between individual and collective ambitions and ultimately boosting overall efficiency.

For employees, it clarifies the company's financial focus and the mechanisms that drive success, enabling smarter, career-enhancing choices.

For investors, it provides:

• A clearer view of the risks inherent in managerial choices.

• The robustness and continuity of cash flow.

• The congruence with personal investment strategies.

For business owners, it equips them with the knowledge to make educated decisions and optimize the distribution of their business's resources.

Now, let's delve into the four recommended steps for evaluating a company's financial robustness:

Scrutinize the Balance Sheet

Purpose: To inspect the company's immediate financial standing and long-term viability, measure how efficiently assets are being utilized, and understand the company's debt-to-equity dynamics.

Examine the Income Statement

Purpose: To assess the company's revenue-generating capabilities and operational efficiency, ensuring it can pay off its expenses and thrive financially during economic downturns.

Evaluate the Cash Flow Statement

Purpose: To understand the company's cash generation efficacy, which is indicative of its ability to maintain and expand operations and meet its financial obligations.

Conduct a Comprehensive Ratio Analysis

Purpose: By integrating horizontal and vertical analyses, ratio analysis reveals a company's financial health, offering insights into its profitability, liquidity, solvency, operational efficiency, and capacity to generate cash flow in alignment with its strategic goals.

Most Confusing Finance Terms Explained

FIXED COSTS VS. VARIABLE COSTS

• Fixed Costs: Costs that do not change with production or sales volume (e.g., rent).

• Variable Costs: Costs that vary with production or sales volume (e.g., materials, direct labor).

EBITDA VS. NET INCOME

• EBITDA: Earnings before interest, taxes, depreciation, and amortization.

• Net Income: Total profit after all expenses, including interest, taxes, depreciation, and amortization.

PROFIT VS. REVENUE

• Profit: Net earnings after deducting all expenses.

• Revenue: Total Income generated from sales or services before deducting expenses.

CAPEX VS. OPEX

• CapEx: Funds used by a company to acquire, upgrade, and maintain physical assets (PPE, buildings, or intangibles)

• OpEx: Day-to-day business expenses (e.g., rent, utilities).

ACCRUAL VS. CASH ACCOUNTING

• Accrual Accounting: Recording revenues and expenses when they are incurred, regardless of when cash is exchanged.

• Cash Accounting: Recording revenues and expenses only when cash is exchanged.

MARKET CAP VS. ENTERPRISE VALUE

• Market Cap: Total value of a company's outstanding shares.

• Enterprise Value: Total value of a company, including debt and excluding cash

Financial statements aren't just for accountants or finance teams.

They are a guidebook for various stakeholders, from investors to competitors.

Each user has a unique perspective and focuses on different aspects of these statements.

Grasping the diverse uses of financial statements can provide a significant competitive edge, empowering you as a business or finance professional in strategic decision-making and relationship-building.

? Red Flags in Financial Statements ?

• Declining profit margins

• Creative accounting practices

• Excessive debt levels

• Inconsistent Cash Flow

• Frequent changes in auditors

• Overstated revenue or assets

• Integrity concerns

• Unusual inventory levels

• Declining market share

• Unexplained changes in accounting policies

What is Working Capital?

Here's a simple way to understand this confusing finance term.

Working capital -- aka Net Working Capital -- is the difference between a company's current assets (expected to be used/consumed/converted into cash <1 year) and current liabilities (debts that are expected to be paid off in <1 year).

Why is working capital important?

Working Capital is a quick way to assess a company's liquidity, which is its ability to meet its short-term obligations.

It serves as an indicator of a company's financial health.

If working capital is positive, it indicates that a company has sufficient resources to cover its short-term financial needs.

If working capital is negative, it indicates that a company may face financial difficulties.

There are three ways to calculate working capital:

THE SIMPLE METHOD

Current Assets - Current Liabilities

This is the most common method and easiest to calculate.

THE NARROW METHOD

(Current Assets - Cash) - (Current Liabilities - Debt)

This method excludes cash & debt, which can help compare companies with different capital structures.

THE SPECIFIC METHOD:

Accounts Receivable + Inventory - Accounts Payable:

This method focuses on the cash conversion cycle of a business, which is the time it takes to convert inventory into cash.

The 10 Key Types of Equity Everyone Should Understand.

Master them to refine your capital structure,

To drive optimal financing strategies,

To seize growth opportunities,

To increase profitability.

1️⃣ Angel Investors

• Gain funding from wealthy individuals looking to invest in promising startups.

• Offer equity in exchange for capital in early-stage companies

• It also provides mentorship and industry connections

2️⃣ Venture Capital

• Secure funding from venture capital firms focusing on high-growth potential businesses

• Involves significant equity given away, often in multiple funding rounds

• Provides extensive resources and guidance, but requires sharing control

3️⃣ Seed Funding

• Obtain initial capital to start or expand the business, often from family, friends, or early investors.

• Typically, smaller amounts that help prove a concept before seeking more significant investments

• Often structured as convertible notes or equity stakes

4️⃣ Crowdfunding

• Raise small amounts of money from many people

• Can offer rewards, equity, or debt based on the type of crowdfunding

• Enables validation of business concepts through market interest

5️⃣ Private Equity

• Access capital from private equity firms

• Involves significant investment in exchange for substantial equity stakes

• Firms actively engage in managing and growing the business

6️⃣ Initial Public Offering (IPO)

• Offer shares to the public in a new stock issuance, providing capital for expansion

• Increases scrutiny as public companies must adhere to strict regulatory standards

7️⃣ Corporate Venture Capital

• Receive investment from a corporation looking to fund startups with strategic alignment

8️⃣ Convertible Debt

• Borrow money under the condition that the debt will convert into equity

• Protects investors with the security of debt instruments

• Useful for startups in early stages when valuation is challenging

9️⃣ Equity Crowdfunding

• Raise capital by selling small amounts of equity to a large number of investors via crowdfunding platforms

• Allows investors from various backgrounds to invest in startups they believe in

• Provides startups with a broad investor base and potential brand advocates

? Employee Stock Ownership Plans (ESOPs)

• Provide company shares to employees as part of compensation

• It helps align employee interests with those of shareholders

What would you add?

Debt vs Equity

Debt vs Equity: does Debt to Equity tell the whole picture?

We must measure how well a company invests to grow.

Companies have two options beyond internal (free cash flow).

Debt or Equity.

Understanding these options can significantly influence a company's financial structure and growth trajectory.

???? involves borrowing money that must be repaid over time, with interest.

It includes instruments like bank loans, bonds, debenture, and credit lines.

Debt financing is advantageous because interest payments are tax-deductible, and it doesn't dilute ownership.

However, it requires regular repayments that can strain cash flow, and excessive debt can lead to an increased risk of bankruptcy.

?????? represents ownership in a company acquired through instruments like stocks.

Equity financing allows companies to raise capital without incurring debt.

The main advantages include no obligation for repayment and no interest expenses, which is beneficial during cash flow downturns.

However, issuing Equity can dilute current shareholders' stakes and might lead to conflicting interests among investors.

????? ?? ????:

1. ??????? ????: Backed by collateral, offering lower risk and interest rates. Think bonds or bank loans

2. ????????? ????: Based on creditworthiness, typically carrying higher interest rates. Think lines of credit or commercial paper.

????? ?? ??????:

1. ?????? ??????: Provides voting rights and dividends, subject to business performance.

2. ????????? ??????: Often carries no voting rights but provides fixed dividends.

????????? ????:

1. ????-??-?????? ?????: Indicates the proportion of debt to shareholder equity, look for ratios < 1.0

2. ???????? ???????? ?????: Shows how easily a company can pay interest on its outstanding. Ideal > 3x

????????? ??????:

1. ?????? ?? ?????? (???): Measures how well a company leverages its Equity to grow profits. Look for > 15%.

2. ?????-??-???????? ????? (?/?): Helps evaluate if a stock price accurately reflects the company's earnings prospects. The higher, the better.

So, to summarize:

Don't let some ratio decide whether a company has too much debt.

Reason from first principles.

What's the ???? created by all this debt? Is this risk comfortably manageable given the company's cash-generating power? Or is Equity a better option for the company?

I am excited to share a guide on Debt Financing. I address the essential aspects of the topic to provide insight into how strategic borrowing can rocket a business to new heights. Jump in and enhance your financial strategy today.

What This Guide Will Cover

1️⃣ Overview of Debt Financing.

2️⃣ Purpose, Importance & Key players involved.

3️⃣ Types of Debt Financing.

3️⃣ Debt Term Length & Security.

4️⃣ Impact on Financial Statements.

5️⃣ Key Considerations Before Borrowing.

6️⃣ Leading Debt Financing Options Globally and their reason.

7️⃣ Pros and Cons of Debt Financing.

8️⃣ Summary.

Financial Analysis Course: How to Read a 10-K

I'll teach you how to analyze a

• Balance sheet

• Income Statement

• Cash Flow Statement

1️⃣ Balance sheet

A balance consists of the following elements:

• Current Assets

• LT Assets

• Current Liabilities

• LT Liabilities

• Shareholders Equity

It shows you what the company owns and owes.

This statement is based on a simple formula:

Assets = Liabilities + Equity

2️⃣ Income Statement

An income statement shows you the income and expenses of a company.

Revenue

- COGS

= Gross Profit

- Operating Expenses

= Operating Income

- Non-Operating Income/Expenses

= Pre-Tax Income

- Taxes

= Net Income

3️⃣ Cash Flow Statement

The Cash Flow Statement consists of 3 elements:

• Cash Flow from Operating Activities

• Cash Flow from Investing Activities

• Cash Flow from Financing Activities

It shows you the cash that enters and leaves a company.

Cash Flow from Operating Activities

Net Income

+ Non-Cash Changes

+/- Changes in Working Capital

= Cash Flow from Operations

Cash Flow from Investing Activities

- Capital Expenditures

- Acquisitions

+ Proceeds from the sale of investments

= Cash Flow from Investments

Cash Flow from Financing Activities

+/- Borrow/Repay Debt

+/- Issue/Repurchase of stocks

- Pay Dividends

= Cash Flow from Financing

Financial statement ratio analysis involves evaluating relationships between figures in the financial statements (Balance Sheet, Income Statement, and Cash Flow Statement) to assess a company's performance, financial health, and underlying value. These ratios provide insights into various aspects like profitability, liquidity, efficiency, and solvency. Here's a breakdown of key categories of financial ratios:

Profitability Ratios: These ratios measure a company's ability to generate profit relative to its revenue, operating costs, balance sheet assets, and shareholders' equity.

• • Net Profit Margin: (Net Income / Revenue) * 100. It shows the percentage of revenue that turns into profit after all expenses.

  • Return on Assets (ROA): Net Income / Total Assets. This indicates how effectively a company uses its assets to generate profit.

  • Return on Equity (ROE): Net Income / Shareholders' Equity. It measures the return generated on the shareholders' investment in the company.

Liquidity Ratios: These assess a company's ability to meet its short-term obligations and thus remain solvent.

• • Current Ratio: Current Assets / Current Liabilities. A ratio above 1 indicates that the company has more current assets than current liabilities.

  • Quick Ratio (Acid-Test Ratio): (Current Assets - Inventories) / Current Liabilities. It's a more stringent measure than the current ratio, excluding inventory from current assets.

Efficiency Ratios: These ratios evaluate how well a company uses its assets and liabilities internally.

• • Asset Turnover Ratio: Revenue / Average Total Assets. This measures the efficiency of a company's use of its assets in generating sales revenue.

  • Inventory Turnover: Cost of Goods Sold / Average Inventory. It shows how quickly a company sells and replaces its inventory.

Leverage (Solvency) Ratios: These ratios provide insight into a company's use of debt for funding its operations.

• • Debt-to-Equity Ratio: Total Liabilities / Shareholders' Equity. It indicates the proportion of equity and debt the company uses to finance its assets.

  • Interest Coverage Ratio: EBIT (Earnings Before Interest and Taxes) / Interest Expense. This shows how easily a company can pay interest on its outstanding debt.

Valuation Ratios: These are used to assess the attractiveness of a company's investment potential.

• • Price-to-Earnings (P/E) Ratio: Market Price per Share / Earnings per Share. It shows how much investors are willing to pay per dollar of earnings.

  • Price-to-Book (P/B) Ratio: Market Price per Share / Book Value per Share. It compares a company's market value to its book value.

Each of these ratios provides different insights and should be used in conjunction with others for a comprehensive analysis. It's also important to compare these ratios to industry averages, historical data, and competitor data to get a clear picture of a company's performance. Ratio analysis is a fundamental aspect of fundamental analysis and is widely used by investors, analysts, and finance professionals.

Welcome to "How to Analyze Financial Statements Fast," a concise guide to help you quickly understand and interpret a company's key financial documents. This resource is for those who need to grasp the essentials of financial statements without diving into overwhelming detail.

Every company produces three primary financial statements, each serving a distinct purpose:

• Balance Sheet: Provides a snapshot of a company's net worth at a specific point in time.

• Income Statement: Reveals whether the company is profitable over a particular period.

• Cash Flow Statement: Shows the movement of cash in and out of the business over time.

In this guide, we break down each statement into its core components and highlight the critical elements to focus on for a rapid assessment:

1. Balance Sheet

   • Cash & Equivalents: Assess liquidity.

   • Debt: Compare against cash holdings.

   • Goodwill: Check for significant amounts.

   • Retained Earnings: Ensure they are positive and growing.

   • Receivables & Inventory: Monitor their levels.

2. Income Statement

   • Revenue: Track trends.

   • Gross Profit: Observe changes.

   • Earnings Per Share: Check profitability.

   • Shares Outstanding: Note any fluctuations.

   • Operating Expenses: Evaluate stability.

3. Cash Flow Statement

   • Operating Cash Flow (OCF): Determine positivity and growth.

   • Capital Expenditures (CapEx): Compare with OCF.

   • Non-Cash Charges (NCC): Look for stock-based compensation.

   • Stock Transactions: Identify buybacks or issuances.

   • Debt Management: Check borrowing and repayment activities.

With less than five minutes of analysis per statement, this guide will help you swiftly identify a company's strengths and weaknesses, providing a solid foundation for more in-depth financial decision-making.

In today's data-rich business landscape, it's easy to get overwhelmed by the sheer volume of information. But what if you could harness the power of data to drive growth, improve efficiency, and make informed decisions that propel your business forward?

The answer lies in data analysis. You can uncover hidden insights, identify trends, and make data-driven decisions that drive results by leveraging the right analytical tools and techniques.

Here are eight essential ways to analyze data for business decision-making:

Ratio Analysis: Assess your company's liquidity, operational efficiency, and profitability.

Trend Analysis: Identify patterns and trends to forecast future performance.

Cash Flow Analysis: Understand your company's ability to generate cash and cover debts.

Break-Even Analysis: Determine the point where revenue equals expenses.

DuPont Analysis: Decompose Return on Equity (ROE) into three components: profit margin, asset turnover, and financial leverage.

Monte Carlo Simulation: Assess the impact of risk and uncertainty in predictions and forecasts.

Scenario Analysis: Evaluate the impact of different predefined scenarios on a decision's outcome.

Sensitivity Analysis: Understand how a single input affects the output of a model.

Download the MBA ASAP Financial Ratios Handbook for the Most Important Financial Ratios with their Formulas. Here is what you will find:

Liquidity Ratios:

- Current Ratio: Current Assets / Current Liabilities

- Quick Ratio: (Current Assets - Inventory) / Current Liabilities

- Cash Ratio: Cash and Cash Equivalents / Current Liabilities

Profitability Ratios:

-Net Profit Margin: Net Profit / Revenue

-Gross Profit Margin: (Revenue - Cost of Goods Sold) / Revenue

-Return on Assets (ROA): Net Income / Average Total Assets

Efficiency Ratios:

-Inventory Turnover: Cost of Goods Sold / Average Inventory

-Receivables Turnover: Revenue / Average Accounts Receivable

-Asset Turnover: Revenue / Average Total Assets

Solvency Ratios:

-Debt to Equity Ratio: Total Debt / Shareholders' Equity

-Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest Expense

-Debt Ratio: Total Debt / Total Assets

Valuation Ratios:

-Price-to-Earnings (P/E) Ratio: Market Price per Share / Earnings per Share (EPS)

-Price-to-Book (P/B) Ratio: Market Price per Share / Book Value per Share

-Dividend Yield: Dividends per Share / Market Price per Share

Return Ratios:

-Return on Equity (ROE): Net Income / Average Shareholders' Equity

-Return on Investment (ROI): Net Profit / Investment Cost

-Return on Capital Employed (ROCE): Earnings Before Interest and Taxes (EBIT) / Capital Employed

Coverage Ratios:

-Fixed Charge Coverage Ratio: (EBIT + Lease Payments) / (Interest + Lease Payments)

-Debt Service Coverage Ratio: Net Operating Income / Debt Service

Growth Ratios:

-Earnings Growth Rate: (Current Year EPS - Last Year EPS) / Last Year EPS

-Sales Growth Rate: (Current Year Sales - Last Year Sales) / Last Year Sales

-Dividend Growth Rate: (Current Year Dividends - Last Year Dividends) / Last Year Dividends

Market Ratios:

-Market Capitalization: Number of Shares Outstanding * Market Price per Share

-Earnings per Share (EPS): Net Income / Weighted Average Shares Outstanding

-Dividends per Share: Total Dividends Paid / Number of Shares Outstanding

Payout Ratios:

-Dividend Payout Ratio: Dividends per Share / Earnings per Share

-Retention Ratio: (Net Income - Dividends) / Net Income

Learning and understanding these ratios can empower financial professionals like you to make informed decisions and optimize business performance.

Vertical and Horizontal Analysis

Vertical and horizontal analysis are techniques used in financial statement analysis to assess

• a company's performance,

• financial health, and

• to compare it with other companies or

• its historical performance.

Here's a detailed breakdown of their professional differences:

Definition:

???????? ????????

It involves expressing each item on a particular financial statement as a percentage of a base figure.

For example, each line item (like Cost of Goods Sold or Operating Expenses) can be presented as a percentage of total revenue on an income statement.

?????????? ????????

Evaluates changes in financial statement numbers across multiple periods.

It looks at the amount and percentage change from one period to the next.

???????:

???????? ????????

Provides insights into the structure of assets, liabilities, and equity OR the composition of revenues and expenses.

It helps in understanding the relative proportion of each component.

?????????? ????????

It helps to identify trends over time.

Aids in determining if certain financial metrics are improving or deteriorating over time.

???? ??? ??????????:

???????? ????????

Each item is compared to a single item within the same period. For instance, on a balance sheet, all accounts might be represented as a percentage of total assets.

?????????? ????????

Items are compared to the same item from a previous period.

Two basic techniques are used in Corporate Finance.

One is the ratio analysis of financial statements, and the other is calculating the present value of future cash flows.

Bankers, investors, financiers, CFOs, and entrepreneurs use these tools and techniques to value assets and make decisions. 

This section will look at using financial ratios as a capital budgeting, analysis, and allocation tool. There are lots of different accounting ratios that get used inside a firm.   

By ratio analysis, I mean taking two numbers from financial statements and dividing one by the other. So we are taking two pieces of accounting data, putting one over the other, forming a ratio.

We are taking two pieces of data and creating a performance metric. Ratios are presented as a percentage or a number depending on whether the usual case is bigger or less than one. 

Ratios are a performance analysis tool. Ratios allow us to compare different companies or a company over time.

Ratios are great tools to make this comparison because they enable us to “normalize” the numbers. A ratio eliminates size differences and allows for pure comparison to compare apples to apples. 

Financial ratios are derived from accounting information and rely on understanding financial statements.

Financial Statement Analysis and Ratios

Accounting and Finance overlap in this area.  The launching place for Corporate Finance is the ability to read and understand Financial Statements. The analysis of financial statements and subsequent assumptions and projections based on that analysis is the next step. 

Financial Statement Analysis is the process of analyzing a company's financial statements and comparing the analysis across companies and industries in order to make better operating and investing decisions. This analysis method involves specific techniques for evaluating and quantifying risk, performance, financial health, and the future prospects of an enterprise. 

We can look at the performance of a particular company over time such as year to year results.  This is called Horizontal Analysis. 

And we can look at various performance characteristics within a single time period. This is called Vertical Analysis. 

We can create metrics across an industry segment as an average value to compare our company against.  This is called Benchmarking.  We can also aggregate up different industry groups and see how they perform relative to each other.  This type of analysis can be helpful in gauging where to allocate investment dollars in a portfolio.  It can also be used to see how a management team is performing relative to its competition.    

How to analyze a business, FAST:

Study these 12 accounting ratios.

PROFITABILITY RATIOS

→ Gross Profit Margin = Gross Profit ➗ Sales

→ Operating Margin = Operating Profit ➗ Sales

→ EBITDA Margin = EBITDA ➗ Sales

→ Net Profit Margin = Net Income ➗ Sales

RETURN ON CAPITAL RATIOS

→ Return on Equity = Net Income ➗ Total Equity

→ Return on Assets = Net Income ➗ Total Assets

→ Return on Capital Employed = EBIT ➗ (Total Assets - Current Liabilities)

→ Return on Invested Capital = NOPAT ➗ Invested Capital

LIQUIDITY RATIOS

→ Current Ratio = Current Assets ➗ Current Liabilities

→ Cash Ratio = Cash & Cash Equivalents ➗ Current Liabilities

FINANCIAL LEVERAGE RATIOS

→ Debt Ratio = Total Debt ➗ Total Assets

→ Debt To Equity Ratio = Total Liabilities ➗ Total Equity

DIVIDEND POLICY RATIOS

→ Payout Ratio = Dividend Per Share ➗ Earnings Per Share

→ Dividend Yield = Dividend Per Share ➗ Share Price

Notes:

EBT = Earnings Before Tax

EBIT = Earnings Before Interest & Taxes

EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization

NOPAT = Net Operating Profit After Tax

What ratios do you look at the most?

In this lecture I show you a spreadsheet with Financial Statements and we calculate and discuss financial ratios.   Download the spreadsheet in order to get better insight into the calculations and how financial statements interconnect and flow.    

Horizontal and Vertical Analysis   

Horizontal analysis compares financial information over time, typically from past financial statements such as the income statement. When comparing this past information we look for variations of particular line items such as higher or lower earnings, sales revenues, or particular expenses. Horizontal analysis is used to look for trends that can be extrapolated in order to predict future performance.    

Vertical analysis is a proportional analysis performed on financial statements. It is ratio analysis. Line items of interest on the financial statement are listed as a percentage of another line item. For example, on an income statement each line item will be listed as a percentage of Sales.     

Financial Ratios   

Financial ratios are powerful tools used to assess company upside, downside, and risk. There are four main categories of ratios: liquidity ratios, profitability ratios, activity ratios and leverage ratios. These are typically analyzed over time and across competitors in an industry. Using ratios “normalizes” the numbers so you can compare companies in apples-to-apples terms.    

Liquidity and Solvency   

Solvency and liquidity are both refer to a company’s financial health and viability. Solvency refers to an enterprise's capacity to meet its long-term financial commitments. Liquidity refers to an enterprise’s ability to pay short-term obligations. Liquidity is also a measure of how quickly assets can be sold to raise cash.    

A solvent company is one that owns more than it owes. It has a positive net worth and is carrying a manageable debt load. A company with adequate liquidity may have enough cash available to pay its bills, but may still be heading for financial disaster down the road. In this case a company meets liquidity standards but is not solvent. Healthy companies are both solvent and possess adequate liquidity.    

Liquidity ratios are used to determine whether a company has enough current asset capacity to pay its bills and meet its obligations in the foreseeable future (current liabilities).  Solvency ratios are a measure of how quickly a company can turn its assets into cash if it experiences financial difficulties or is threatened with bankruptcy. Both measure different aspects of if, and how long, a company can pay its bills and remain in business.    

The current ratio and the quick ratio are two common liquidity ratios. The current ratio is current assets/current liabilities and measures how much liquidity (cash) is available to address current liabilities (bills and other obligations).  The quick ratio is (current assets – inventories) / current liabilities.  The quick ratio measures a company’s ability to meet its short-term obligations based on its most liquid assets, and therefore excludes inventories from its current assets. It is also known as the “acid-test ratio.”   

The solvency ratio is used to examine the ability of a business to meet its long-term obligations. Lenders and bankers most commonly use the solvency ratio because they are most concerned about their ability to get paid back any money they lend. The ratio compares cash flows to liabilities. The solvency ratio calculation involves the following steps:   

All non-cash expenses are added back to after-tax net income. This approximates the amount of cash flow generated by the business. You can find the numbers to add back in the Operations section of the Cash Flow Statement.    

Add together all short-term and long-term obligations.  This is the Total Liabilities number on the Balance Sheet. Then divide the estimated cash flow figure by the liabilities total.   

The formula for the ratio is:   

(Net after-tax income + Non-cash expenses)/(Short-term liabilities + Long-term liabilities)   

A higher percentage indicates an increased ability to support the liabilities of a business over the long-term. Acceptable solvency ratios vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy.    

Remember that estimations made over a long term are inherently inaccurate. There are many variables that can impact the ability to pay over the long term. Using any ratio to estimate solvency needs to be taken with a grain of salt.   

Financial Ratios Handbook

This compilation includes:

Profitability Ratio

A. Return

Return on Equity

Return on Assets

Return on Capital Employed

B. Margin

Gross Margin Ratio

Operating Profit Margin

Net Profit Margin

Leverage Ratio

Debt-to-Equity Ratio

Equity Ratio

Debt Ratio

Efficiency Ratio

Accounts Receivable Turnover Ratio

Accounts Receivable Days

Asset Turnover Ratio

Inventory Turnover Ratio

Inventory Turnover Days

Liquidity Ratio

A. Asset

Current Ratio

Quick Ratio

Cash Ratio

Defensive Interval Ratio

B. Earnings

Times Interest Earned Ratio

C. Cash Flow

Times Interest Earned (Cash Basis) Ratio

CAPEX to Operating Cash Ratio

Operating Cash Flow Ratio

Valuation Ratio

A. Price

Price-to-Earnings Ratio

B. Enterprise Value

EV/EBITDA Ratio

EV/EBIT Ratio

EV/Revenue Ratio

Key Financial Ratios

Here's everything you need to know:

Balance Sheet Ratios

You want to invest in companies that are in good financial shape.

• Interest Coverage

• Net Debt/Free Cash Flow

• Goodwill/Assets

Capital intensity

The lower the capital intensity, the better

• CAPEX/Sales

• CAPEX/Cash from Operations

Capital Allocation

Capital allocation skills are the most critical task of management.

• Return On Equity (ROE)

• Return On Invested Capital (ROIC)

• Return On Capital Employed

Profitability

The higher the profitability, the better

• Gross Margin

• EBIT Margin

• Free Cash Flow Margin

Dividend

You want a company's dividend to be gradually increasing and robust.

• Dividend yield

• Payout ratio

Valuation

The cheaper you can buy a company, the higher your margin of safety

• Price-to-earnings ratio

• Free Cash Flow Yield

20 Financial Feasibility Terms

When conducting a financial feasibility study, you need to keep specific terminologies in mind.

And what they mean and how do you use them in your feasibility.

Here are 20 terms to know: (Check out the downloadable PDF below)

1- CAPEX (Initial Investment)

2- OPEX

3- Revenue

4- Gross Profit

5- Net Income

6- Cash Flow

7- Payback Period

8- Internal Rate of Return (IRR)

9- Net Present Value (NPV)

10- Return on Investment

11- Profitability Index (PI)

12- Return on Equity (ROE)

13- Return on Capital Employed (ROCE)

14- Debt Service Coverage Ratio (DSCR)

15- Break-Even Point

16- Sensitivity Analysis

17- Discount Rate

18- Weighted Average Cost of Capital (WACC)

19- Working Capital

20- Terminal Value

KPIs

Key Performance Indicators

???? ?? ????? ???? (????)

COGS = Direct Materials + Direct Labor + Manufacturing Overhead

COGS = Opening Inventory + Purchases - Ending Inventory

Your direct costs associated with producing a product or delivering a service expressed in absolute terms or as a percentage of revenue.

????????? ??????? ?????: Operating Expenses / Net Sales x 100

Evaluates how much of the total sales is consumed by operating expenses.

???????? ???? ?????: Variable Costs / Sales x 100

Assesses the proportion of sales that is consumed by variable costs.

????? ???? ?????: Fixed Costs / Sales x 100

Evaluates the proportion of sales that is consumed by fixed costs.

?????? ????? ???? %: Direct Labor Costs / Sales x 100

Measures the percentage of sales that goes towards compensating the labor directly involved in producing a product.

????? & ????????? ?????: Sales & Marketing Expenses / Sales x 100

Indicates the percentage of sales spent on sales and marketing activities.

???????? & ??????????? (?&?) ?????: R&D Expenses / Sales x 100

Measures the percentage of sales invested in research and development activities.

??????? & ?????????????? (?&?) ?????: G&A Expenses / Sales x 100

Evaluates the percentage of sales consumed by general and administrative expenses.

????????? ????????: Cost of Goods Sold / Average Inventory

Indicates how many times a company's inventory is sold and replaced over a period.

???? ?? ?????????: 365 / Inventory Turnover

Measures the average number of days items stay in inventory before being sold.

Ratios every investor should know:

Liquidity and efficiency

▪️Quick: immediate short-term debt-paying ability

▪️Current ratio: short-term debt-paying ability

▪️Accounts receivable turnover: Efficiency of collection

▪️Inventory turnover: Efficiency of inventory management

▪️Days' sales uncollected: Liquidity of receivables

▪️Days' sales in Inventory: Liquidity of inventory

▪️Total asset turnover: Efficiency of assets in producing sales

Solvency

▪️Debt ratio: Creditor financing and leverage

▪️Equity ratio: Owner Financing

▪️Debt-to-equity ratio: Debt versus equity financing

▪️Times interest earned: Protection in meeting interest payments

Profitability

▪️Gross margin: Gross margin in each sales dollar

▪️Profit margin: Net income in each sales dollar

▪️Return on Assets: Overall profitability of assets

▪️Return on Equity: Profitability of owner investments

▪️Book value per common share: Liquidation at reported amounts

▪️Earnings per share: Net income per common share

Market Prospects

▪️ Price-earnings ratio: Market value relative to earnings

▪️ Dividend yield: Cash returns per common share

The Most Important Financial Ratios

Including:

1️⃣ Liquidity Ratios

2️⃣ Profitability Ratios

3️⃣ Efficiency Ratios

4️⃣ Solvency Ratios

5️⃣ Valuation Ratios

6️⃣ Return Ratios

7️⃣ Coverage Ratios

8️⃣ Growth Ratios

9️⃣ Market Ratios

? Payout Ratios

Envision a voyage into the intricate realm of financial statements, armed with a compass that hones your analytical prowess. Welcome to the 'Financial Statement Analysis Workbook' by Martin Fridson and Fernando Alvarez, a game-changing resource meticulously crafted to demystify the often perplexing domain of corporate finance.

This workbook presents a systematic, progressive method to master financial statement analysis. Through a series of thoughtfully designed exercises and tests, this guide reinforces theoretical understanding and immerses you in practical applications, rendering the intricate world of financial statements accessible and compelling.

Why is this workbook a must-read for students? Here are a few compelling reasons:

1. Practical Application: This workbook offers real-world scenarios and exercises beyond theoretical learning. This practical approach empowers you to understand the principles of financial statement analysis and confidently apply them in real-life situations.

2. Critical Thinking: The questions and exercises are designed to challenge your analytical skills, encouraging you to think critically and develop a skeptical eye toward financial reports. This is crucial in an era where financial misreporting and accounting gimmicks can mislead even the most experienced analysts.

3. Expert Insights: Authored by Martin Fridson and Fernando Alvarez, renowned experts in the field, the workbook distills decades of experience into practical advice and insightful commentary. Their expertise provides a solid foundation for understanding the nuances of financial analysis.

4. Comprehensive Coverage: The workbook spans a wide range of topics, from basic financial concepts to advanced analytical techniques. Whether you're a beginner or an advanced student, the content is designed to support your learning at every stage.

5. Interactive Learning: The format of the workbook promotes interactive learning. By actively engaging with the material, you retain information more effectively and develop a deeper understanding of the subject matter.

In today's dynamic financial landscape, accurately interpreting financial statements is a vital skill. This workbook equips you with the tools to navigate this landscape, enhancing your decision-making capabilities. Stay ahead of the curve with the Financial Statement Analysis Workbook.

Embark on this educational journey with the "Financial Statement Analysis Workbook" and transform your understanding of financial statements from a daunting challenge into a rewarding skill. This workbook is not just a study guide; it is your gateway to becoming a savvy financial analyst, ready to tackle the complexities of the financial world with confidence and precision. Dive in and discover the power of financial statement analysis today!

Will investment analysts soon be out of a job?

We investigate whether an LLM can successfully perform financial statement analysis in a way similar to a professional human analyst. We provide GPT4 with standardized and anonymous financial statements and instruct the model to analyze them to determine the direction of future earnings. Even without any narrative or industry-specific information, the LLM outperforms financial analysts in its ability to predict earnings changes.

The LLM demonstrates a relative advantage over human analysts in certain situations where the latter may struggle. However, it's important to note that the LLM's prediction accuracy is comparable to a narrowly trained state-of-the-art ML model. This suggests that LLMs could serve as a valuable tool in the financial industry, complementing the expertise of human analysts rather than replacing them.

LLM prediction does not stem from its training memory. Instead, the LLM generates useful narrative insights about a company's future performance. Lastly, our trading strategies based on GPT's predictions yield a higher Sharpe ratio and alphas than strategies based on other models. Our results suggest that LLMs may take a central role in decision-making.

Check out the paper below.

Applied Corporate Finance

A masterwork by Aswath Damodaran

Here's what you'll learn:

- Foundations of Corporate Finance:

- Investment Decisions

- Financing Decisions

- Dividend Decisions

- Valuation

- Risk Management

- Corporate Governance

- Behavioral Finance

- Global Perspective

- Case Studies

This e-book, "Financial Distress: The Leading Cause of Corporate Turnaround," explores the critical financial challenges that often necessitate a turnaround.

Here are a couple of highlights from the e-book:

Declining Revenue

Persistent declines in sales or revenue can signal deeper issues within a company, from market competition to product obsolescence. Addressing the root cause is crucial to reversing the trend and stabilizing the business.

Increasing Debt

High debt levels can become unsustainable, especially if revenue is insufficient to cover interest and principal payments. A comprehensive financial review and restructuring may be necessary to manage debt levels and regain financial health.

Understanding and addressing financial distress is crucial for any business leader aiming to steer their company back to stability and growth.

Attached is a downloadable primer on Python coding.  Use it as an introduction or review.